Internal Finance

This section explains Internal Finance covering, Owner’s Capital and Personal Savings, Retained Profit and the Sale of Assets.

Raising finance is a critical aspect of starting or expanding a business. Internal finance refers to the funds that a business generates from its own activities, rather than from external sources such as loans or investors. This guide will explore three key sources of internal finance: Owner's Capital, Retained Profit, and Sale of Assets.

Owner’s Capital (Personal Savings)

Owner’s capital refers to the personal savings that the business owner invests into their business. This is a common source of finance for small businesses, especially in their early stages. The owner may use their savings from personal accounts or previous earnings to fund the start-up or ongoing operations of the business.

Advantages:

• No interest or repayment obligations: Unlike loans or other external finance options, there is no need to pay interest or repay the capital.
• Control: The owner maintains full control over the business and decision-making.
• Quick and easy access: Personal savings are readily available, allowing the business to access funds quickly.

Disadvantages:

• Risk: The owner is at risk of losing their personal savings if the business fails.
• Limited funds: The amount available is limited to the owner's personal wealth, which may not be sufficient for larger business expansions.
• Opportunity cost: The owner may miss out on personal investments or other opportunities if too much capital is tied up in the business.

Retained Profit

Retained profit is the portion of a business's net profit that is kept in the company rather than being distributed to shareholders or owners. These profits are reinvested into the business for future growth or to finance operations.

Advantages:

• No external obligations: The business does not incur any debt or interest payments.
• Financial stability: Retained profit can contribute to a stronger financial position, reducing reliance on external funding.
• Control: The business owner or management retains full control, as no external investors are involved.

Disadvantages:

• Limited availability: The amount of retained profit depends on the business's profitability, which may not always be sufficient.
• Slower growth: Businesses relying solely on retained profit for growth may experience slower expansion due to limited financial resources.
• Opportunity cost: Retained profit could potentially be used for other purposes, such as paying dividends to shareholders or personal wealth generation.

Sale of Assets

The sale of assets involves selling company-owned property or equipment in exchange for cash. This can be a short-term source of finance to help meet immediate financial needs or fund specific projects.

Advantages:

• Immediate cash flow: Selling assets can provide quick access to cash, which may be necessary for day-to-day operations or covering temporary shortfalls.
• No interest or repayments: Like other internal finance sources, there is no need to repay the funds or incur interest.

Disadvantages:

• Loss of resources: Selling assets means losing valuable resources that may be essential for the business’s operations or future growth.
• Potential impact on operations: If key assets are sold, it may affect the company’s ability to perform certain functions, such as production or delivery of services.
• Short-term solution: Asset sales are generally a one-off event and may not be a sustainable long-term solution for raising finance.

Summary

Each of the internal finance sources, Owner's Capital, Retained Profit, and Sale of Assets – has its own advantages and disadvantages. The choice of which source to use will depend on the business’s needs, its financial situation, and long-term objectives. By carefully considering these options, business owners can make informed decisions that support their growth and financial stability without relying too heavily on external finance.