T26- Internal Finance
Cards (9)
- What are ways to finance a small business?
- cash and investments
- redundancy payments
- inheritance
- personal credit cards
- re mortgaging
- putting time into a business for free
- why are personal sources are important to start-up?
- cheap (compared to bank loan)
- entrepreneur keeps more control over business
- the more the founder puts in, the more others will invest
- focuses the mind
- what are retained profits?Earnings kept by a company for reinvestment.
- what are benefits of retained profits?cheap— the cost of retained profits is the opportunity cost for shareholders of leaving profits in the businessvery flexible- management controls how they are re invested
- shareholders control the proportion retained
- what are drawbacks of retained profits?
- danger of hoarding cash
- shareholders may prefer dividends if the business is not achieving sufficiently high returns on investments
- high profits and cash flows suggest the business could afford debt
- what are sale and lease back agreements?sell of the assets and obtain the funds and then lease it back
- what are asset disposals?
- potentially another one-off boost to finance
- sell off spare land, surplus equipment
- what are advantages of internal finance?
- capital is available immediately. no time delay between identifying a need for finance and obtaining it. (e.g. retained profits will be in bank account already)
- cheap - no interest payments, which means costs will be lower and profit is higher. also no administration costs
- the business will not be subject to credit checks
- no need to involve third parties
- what are disadvantages of internal finances?
- can be limited - a business may not be sufficiently profitable to use retained profits or may be unaware of unwanted assets to sell
- internal sources of finance are not tax deductable
- can be inflexible compared to external sources of finance
- no inflationary benefits
- opportunity costs of finance can be high