Internal Sources of Finance (Edexcel IGCSE Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
Introduction to Internal Sources of Finance
An internal source of finance is money that comes from within a business
The main Sources of Internal Finance
Personal Savings | Retained Profit | Sale of Assets |
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Business owners often prefer using internal finance as it avoids having to pay interest on borrowing or dilution of control by selling shares
Personal Savings
Personal savings are a key source of funds when a business first starts up
Owners may introduce their savings or another lump sum, e.g. money received following a redundancy
Owners may invest more as the business grows or if there is a specific need, e.g. a short-term cash flow problem
Retained Profit
Retained profit is the surplus of revenue over costs that has been generated in previous years and not distributed to owners
This is a cheap source of finance, as it does not involve borrowing and associated interest and arrangement fees
The opportunity cost of investing the money back into the business is that shareholders do not receive extra profit for their investment
Selling Assets
Selling non-current assets that are no longer required (e.g. machinery, land, buildings) generates finance
A sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash
The business sells a non-current asset (most likely a building) for which it receives cash
The business then rents the premises from the new owners
E.g. In early 2023, Sainsbury’s announced that it was in talks to sell the prime retail property for £500 million, which will then be leased back to them by the new owners, LXi Reit
Businesses may also sell inventory at reduced prices in order to raise additional finance
This reduces the risk and storage costs of holding large volumes of inventory
It must be done carefully to avoid disappointing customers if inventory runs low
E.g. Clothing retail businesses commonly hold January sales to get rid of old inventory and make space for new Spring product lines
An Evaluation of Internal Sources of Finance
If a business has sufficient internal finance, it is often preferred to using external sources
However, it must consider the advantages and disadvantages of using internal finance to fund business activities
Advantages and Disadvantages of Internal Sources of Finance
Advantages | Disadvantages |
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Examiner Tips and Tricks
You could be asked to evaluate two sources of internal finance and justify which would be the best option in a given situation. In these questions you need to
Consider both of the options in detail, using the business scenario, so that your points are relevant
Develop logical chains of analysis for both options
Finish with a clear recommendation, with reasons that are linked to the business.
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