Internal Finance

• Internal finance is the money that comes from within an organization, such as profits or retained earnings.
• Retained profit: involves reinvesting some or all of the company's profits into its operations instead of paying them out to shareholders.

  Advantages:

  • Retained profit does not have to be repaid, unlike, for example, a loan.
  • There is no interest to pay – the capital is raised from within the business.

  Disadvantages:

  • A new business will not have any retained profits.
  • Many small firms’ profits might be too low to finance the expansion needed.
  • Keeping more profits in the business reduces payments to owners, for example,dividends to shareholders who might invest in other businesses instead.
• Sale of existing assets: refers to the sale of assets that are not currently being used in the business.

  Advantages:

  • This makes better use of the capital tied up in the business.
  • It does not increase the debts of the business.

  Disadvantages:

  • It may take some time to sell these assets and the amount raised is never certain until the asset is sold.
  • This source of finance is not available for new businesses as they have no surplus assets to sell.
• Sale of inventories to reduce inventory levels:

  Advantages:

  • This reduces the opportunity cost and storage cost of high inventory levels.

  Disadvantages:

  • It must be done carefully to avoid disappointing customers if not enough goods are kept as inventory.
• Owners’ savings: The amount of money that the owners of a business have invest in the business.

  Advantages:

  • It should be available to the firm quickly.
  • No interest is paid.

  Disadvantages:

  • Savings may be too low.
  • It increases the risk taken by the owners as they have unlimited liability.