Internal Finance

Internal Finance

Internal Finance: From inside the business e.g. directors – No time limit

Internal Sources – Retained Profit

• Cheap and flexible
• Technically profit is shareholders, so they need convincing its used effectively
• Usually okay infrequently
• Idea retained profit used to generate future profits and therefore used for purchase of fixed assets
• Opportunity cost needs to be assessed

Internal Sources – Control of working capital and cashflow

Working capital measures, the amount of money the business must pay day-to-day expenses

Working capital = current assets – current liabilities

• Businesses need to be aware of their working capital and ensure that they have enough cash to survive
• Stock and debtor control – arranging appropriate credit terms
• Liquidity – need to manage assets to ensure that the business has sufficient liquidity (ease of converting assets to cash)
• Stock needs to be valued correctly
• Need to ensure are not holding excess stocks or excess cash

Internal Sources – Sales of Assets

• This can allow business to develop more profitable ventures
• If in crisis can sell fixed assets but will lead to a decrease in profitability in long term
• In principle the sale of these assets should allow a firm to increase its level of profit

Internal Sources – Sale and Leaseback

• This allows the organisation to receive a cash payment – improving short term cash flow
• But must rent the asset which may reduce profit long term
• If cash used to buy more profitable assets the cost of rental is covered