Internal Sources

Internal Sources of Finance

Retained Profit

• This is the main source of finance for most businesses.
• It is the profit after tax that has not been distributed as dividends but instead reinvested back into the company.
• Offering no interest or repayment obligations, this is the most cost-effective way of financing business operations.
• However, it depends on the businesses’ profitability and may not be sufficient for major expansions.

Sale of Assets

• If a business has assets it no longer requires, they can be sold off to free up funds.
• This can be particularly helpful for a business in financial difficulties, needing to raise cash quickly.
• It is, however, a one-off form of finance and the business loses the use of the asset sold.

Owner’s Capital

• Also known as personal savings, this refers to the personal money that the owner injects into the business.
• It is typically used during the startup phase and can also be used to finance small scale expansion.
• It can create a high level of personal risk for the owner, especially in businesses with unlimited liability.
• It allows the owner to maintain complete control over the business as there’s no obligation to others.

Working Capital

• This is typically made up of funds from day-to-day trading operations, coming from the business’s own cash flow.
• It’s a crucial source of finance that helps a business cover its short-term liabilities.
• However, if not managed well, it can lead to cash flow problems. The business must ensure they can cover immediate operational costs.

Depreciation Funds

• This is the money set aside for the replacement of fixed assets.
• This is not a source of cash but of funds within the business which can be allocated for purchasing new assets.
• It helps in the smooth running of the business by ensuring necessary assets are replaced when needed.