Internal Finance

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    Internal Finance

    Internal Finance: From inside the business e.g. directors – No time limit

    Internal Sources – Retained Profit

    • Cheap and flexible
    • Technically profit is shareholders, so they need convincing its used effectively
    • Usually okay infrequently
    • Idea retained profit used to generate future profits and therefore used for purchase of fixed assets
    • Opportunity cost needs to be assessed

    Internal Sources – Control of working capital and cashflow

    Working capital measures, the amount of money the business must pay day-to-day expenses

    Working capital = current assets – current liabilities

    • Businesses need to be aware of their working capital and ensure that they have enough cash to survive
    • Stock and debtor control – arranging appropriate credit terms
    • Liquidity – need to manage assets to ensure that the business has sufficient liquidity (ease of converting assets to cash)
    • Stock needs to be valued correctly
    • Need to ensure are not holding excess stocks or excess cash

    Internal Sources – Sales of Assets

    • This can allow business to develop more profitable ventures
    • If in crisis can sell fixed assets but will lead to a decrease in profitability in long term
    • In principle the sale of these assets should allow a firm to increase its level of profit

    Internal Sources – Sale and Leaseback

    • This allows the organisation to receive a cash payment – improving short term cash flow
    • But must rent the asset which may reduce profit long term
    • If cash used to buy more profitable assets the cost of rental is covered

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