Internal Finance

• capital expenditure?


  spending on fixed assets
• revenue expenditure?


  spending on raw materials or day-to-day expenses
• internal finance?

  finance comes from inside the business
• external finance?


  finance comes from outside the business
• sources of internal finance:

  • sales of assets
  • retained profit
  • owners capital(personal saving)
• sales of assets:

  • selling unrequired assets generates a source of finance
  • lease and leaseback arrangement can be used if business wants the asset and needs cash can generate finance by managing its working capital more effectively
• retained profits:

  • profit has been generate in previous years and not distributed to owners is reinvested back into business
  • cheap source of finance - does not involve borrowing + associated interest and arrangement fees
  • opportunity cost: shareholders do not receive extra profit for their investment
• sources of finance:

  • business objectives
  • shares and shareholders
  • cash flow forecasting
  • profits and profitability
  • capital intensity
• benefits of retained profits:

  • cheap
  • very flexible
  • do not dilute the ownership of the company
• downsides of retained profits:

  • may not have enough
  • danger of hoarding cash
  • shareholders may prefer dividends if business is not achieving sufficiently high return on investment
• working capital as a source of finance:

  • reducing working capital
  • finance wasted in excess stocks and trade debtors
  • very low inventory turnover ratio or high debtor days
• stock market 'flotation'?


  private limited companies change legal ownership to become a public limited company to access a large amount of finance - share capital because firm is low floating on the stock exchange
• why is floatation bad?


  very expensive - legal fees, paperwork, need to sell ideas to prospective shareholders - may not buy if they do not share confidence
• why is floatation good?


  ability to raise hundreds of millions
• share issues benefits:

  • able to raise substantial funds if the business has goods prospects
  • broader base of shareholders
  • equity rather than debt = lower risk finance structure
• drawbacks of share issues?


  • can be costly and time consuming
  • existing shareholders holding may be diluted
  • equity has a cost of capital that is higher than debt
• debenture?


  loan issued by the company with a fixed rate of interest
• share capital?


  amount of finance raised through selling shares to shareholders
• capital?


  money a company needs to function/expand
• creditors?


  loan money to debtors
• mortgage?


  loan used to purchase/maintain a home
• venture capital?


  investors providing a business with loans
• grant?


  funds that are not expected to be repaid