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Theme 2: Managing Business Activities
2.1 Raising Finance
2.1.1 Internal and External Finance
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What is internal finance?
Funds from company operations
Internal finance includes funds generated from within a company's own
operations
Retained earnings are
profits
saved from past years.
One source of internal finance is the sale of underutilised or surplus
assets
What does reduced working capital involve?
Efficient inventory and cash flow
Match the source of internal finance with its definition:
Retained Earnings ↔️ Profits saved from past years
Sale of Assets ↔️ Selling surplus assets
Reduced Working Capital ↔️ Efficient inventory management
Retained earnings
do not require interest payments.
What is a disadvantage of the sale of assets as a source of finance?
Loss of asset use
Reduced working capital can free up cash but may impact operational
efficiency
What is external finance?
Funds from outside the company
Match the source of external finance with its definition:
Bank Loans ↔️ Repayable loans with interest
Share Capital ↔️ Equity sold to investors
Trade Credit ↔️ Delayed payments to suppliers
Debentures ↔️ Long-term debt with fixed interest
Bank loans require collateral and may have high
interest rates
.
An overdraft is a type of short-term borrowing from a
bank
What is a disadvantage of share capital as a source of finance?
Dilutes ownership
Trade credit can improve
cash flow
without requiring immediate payment.
Debentures have lower interest rates compared to bank
loans
Order the three main sources of internal finance:
1️⃣ Retained Earnings
2️⃣ Sale of Assets
3️⃣ Reduced Working Capital
What is the definition of retained earnings in internal finance?
Profits saved from past years
The sale of assets provides immediate cash inflow but reduces
future
asset use.
How does reduced working capital contribute to internal finance?
Frees up cash
Retained earnings are readily available but may reduce
dividends
Selling
assets
results in the loss of their use.
What is a potential disadvantage of reduced working capital?
Disrupt operational efficiency
What does Internal Finance refer to?
Funds generated from within
Retained Earnings are profits saved from past
years
The sale of assets provides an immediate
cash inflow
for a company.
What is reduced working capital achieved through?
Efficient cash flow management
Match the source of internal finance with its definition:
Retained Earnings ↔️ Profits saved from past years
Sale of Assets ↔️ Selling underutilised assets
Reduced Working Capital ↔️ Efficient cash flow management
Retained earnings have the advantage of no interest
payments
What is a disadvantage of selling assets for immediate cash inflow?
Loss of asset use
Reduced working capital may impact
operational efficiency
.
Why is internal finance beneficial for a company?
Avoids reliance on external funding
External Finance involves obtaining funds from
outside
What is a bank loan defined as in external finance?
Repayable loan with interest
Overdrafts are a form of
short-term
borrowing from a bank.
What is share capital in external finance?
Equity sold to investors
Venture capital firms provide funding in exchange for a significant ownership
stake
Leasing allows a company to use assets without outright
ownership
.
What is trade credit in external finance?
Delayed payments to suppliers
Debentures are long-term debt instruments with fixed interest
rates
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