A1 Internal Sources of Finance
Owner’s capital is money invested into the business that personally belongs to the owner from their personal savings. They may have saved this over a long period of time, received a redundancy payment or inheritance. The benefits of this are that the business will not have to pay back interest on this. However, drawbacks may include it usually being a small amount of money and the negative impact on the owner’s personal life if the business fails and the money cannot be paid back.
Retained profit is the money from profits that is reinvested back into the business after owners have taken their share of the profits or dividends have been distributed to shareholders. The benefits of this source is that it is not a loan so does not have to be paid back and there are no interest payments. However, this is a slow method to raise money and investors may prefer larger dividends than reinvestment.
Sale of assets is a method of raising money by selling assets that are no longer in use to improve liquidity. For example, if a business is not using a machine anymore, they could sell it and use the money to invest in a more useful asset. Benefits of this method is that the money does not have to be paid back, there are no interest payments and it frees up space. However, a drawback may be that the business needs the assets at a later date and has to buy or lease a new one.
Net current assets is the money that a business has available for day to day spending. It is the difference between all of the current assets (stock, debtors and cash) and the current liabilities (short term loans and creditors). To ensure adequate liquidity, managers must maintain a higher level of current assets than current liabilities
