Business Cambridge Internal finance

1. Edexcel A level Business
Theme 2
2.1.1 Internal Finance

2. From Edexcel
a) Owner’s capital: personal savings
b) Retained profit
c) Sale of assets

3. Starter
• What items of value do you own?
• Do you have any savings?
• Are you good with money?
• If I gave you £20 right now would you save it or
spend it?

4. Definition: Finance
• Finance means the management of the investment needed to; open,
run and grow a business
• There are internal finance methods (investment that comes from
within a business) and external finance methods (investment that
comes from outside the business)
• This topic is just about internal finance, the next unit 2.1.2 is about
external finance

5. Reasons for raising finance
There are many reasons a
business would need to raise
finance, these are the main ones:
A. To start-up
B. To pay off business debts
C. To help a business cope over a
slow trading period
D. To expand
E. To buy stock

6. Owner’s capital: personal savings

7. Internal finance: Owner’s capital
• This is also sometimes called owner’s
equity
• It shows the stake the owner has in the
business
• This represents the net assets of the
company – if all the debts of the business
were paid off how much would be owed to
the owner
• The owner may have used savings or a
redundancy pay out to start up the
business, this is in theory still owed back to
the owner, although they may never take it
back out in the lifetime of the business

8. When is personal savings (owner’s capital) an
appropriate source of finance?
• Sole traders and partnerships
would be the two business forms
which would mostly use personal
savings / owner’s capital start-up,
and to trade and to grow
• The amount of finance that can
be raised will depend on the
savings that the owner has
• Why might the owner have
significant savings?

9. Retained profit

10. Internal finance: Retained profits
• After a year or more of trading a
business may have some profits
that they are able to reinvest into
the business to help it grow
• The advantage of retained profits
is there is no interest to pay, in
comparison to other methods
• The disadvantage is once retained
profit is used it has gone and
cannot be used elsewhere in the
business (opportunity cost)

11. When is retained profit NOT an appropriate
source of finance?
• If a business is in its first year of
trading it will NOT have any
retained profits, as it will not have
made any to retain
• If a business has not been
profitable then there will NOT be
any retained profit for the
business to spend
• The business may have made a
loss and therefore will also NOT
have any retained profit

12. Sale of assets

13. Internal finance: Sale of assets
• A business can raise finance by selling
items that they already own, these
could be:
A. Machinery
B. Land
C. Premises
D. Vehicles
• The business that sells the asset will no
longer have the benefit of that asset and
it will not appear on the balance sheet
of the company, meaning the business
will look less attractive to investors

14. When is the sale of assets appropriate?
• All types of business can sell
their assets, except those that
have just started up
• This may not raise enough
money for growth or expansion
• When a business is growing it
may need to raise cash fast to be
able to continue to trade
• Assets (like a van) can be sold
quickly (same day) for cash
A business is selling its assets.
Why would this be a red flag to a
potential investor in the
business?

15. Suggested activity – research and fill in the boxes
Internal source of
finance
Advantages Disadvantages
Retained profit
Sale of assets
Owners capital

16. Suggested activity – research and fill in the box
Internal source of
finance
Advantages Disadvantages
Retained profit • No interest payments to be made on loans
• Easy access to finance, if it is in a bank
account it could be accessed the same
day, this is in comparison to a loan which
could take longer with all the paperwork
• Owners keep control
• Loss of interest payments on
savings if he retained profits were
left in a savings account instead
• Opportunity cost of not being able
to use the retained profits
elsewhere in the business
Sale of assets • No interest payments to be made on loans
• Straightforward, sales can take place on
a number of platforms e.g. eBay
• No borrowing costs
• Once the business has sold the
asset they lose the benefit of it e.g.
a van they cannot make deliveries
with
• Can indicate to potential investors
that the business is in trouble
Owners capital • No interest payments to be made on loans
• Easy access, the owner may have the
funds sitting in a bank or savings account
• No complex paperwork and no security
needed
• Owner may not have the capital to
put into the business and may still
need to borrow, some businesses
may have long-term debt to gain a
long-term profit

17. Plenary Quiz
Identify which of these is an internal method of
finance:
1. Personal savings of the owner
2. Retained profit if the business is a start-up
3. Sale of machinery
4. Retained profit if the business is established

18. Plenary Quiz Answers
1. Personal savings of the owner YES
2. Retained profit if the business is a start-up NO
3. Sale of machinery YES
4. Retained profit if the business is established
YES

19. Sample Exam Questions

20. Case study for question 1

21. Sample question 1
Knowledge
1
Application
2
Analysis
1

22. Answer sample question 1