Internal & External Sources of Finance

Internal Sources of Finance

Internal sources of finance describes money that is raised within a business. The business doesn’t need anyone else to raise this money.

Retained profit

This is profit that the business has effectively saved whilst it has been operating (running).
Retained profit is a cheap source of finance because a business does not have to pay any interest.
Retained profit is limited. A business can only spend profits that have been saved.
Retained profit may not be high enough to fund big, long-term projects.

Selling assets

A business can sell its assets to raise cash. For example, a company can sell buildings or machinery that they do not use.
They are usually a cheap source of finance because the business does not have to pay interest.
However, selling assets can harm a business’ operations.

Personal savings

This is personal money that is invested by the owner of a company.
It is most relevant for start-up businesses, in which the entrepreneur has saved up to fund his business venture.
A downside is that it can be very risky for an entrepreneur to put a significant amount of their personal savings into a business. They may not be able to afford this.

External sources of finance raise finance (money) from a third party. The finance can be used to fund large, long-term investments. However, external finance is often more expensive because businesses pay interest on loans. There are several sources of external finance:

Bank loans or mortgages

Bank loans and mortgages are very important for many businesses. A business borrows money from a bank and then pays interest on the money borrowed.
It is often harder for new businesses to get bank loans because banks see them as riskier.

Loans from family and friends

Start-ups often use loans from family and friends. This is usually because the entrepreneur doesn’t have enough personal savings to finance the investment.
If the entrepreneur gives up equity (a share of the business) then this is not a loan.

Hire purchases

This is when a business buys something and instead of paying for it upfront pays for it in instalments.
When PSG bought Kylian Mbappe from Monaco, they didn’t pay the whole amount at the time and instead completed the purchase in different stages.
This lets firms buy things (like machinery) for the business that they otherwise wouldn’t be able to afford.

Trade credit

Trade credit describes when firms pay suppliers at a later date. It involves buying something now and paying for it later.

Government grants

A government may give grants (money) to companies to research things that the government is interested in.
The Horizon 2020 fund is a set of grants given out by the countries in the European Union.

1Business Activity & Influences on Business

1.1Business Objectives

1.1.1Business Aims

1.1.2Business Objectives

1.1.3Business Objectives Change Over Time

1.1.4End of Topic Test - Business Aims

1.1.5Diagnostic Misconceptions - Profit

1.2Types of Organisations

1.2.1Sole Traders & Partnerships

1.2.2Limited Companies

1.2.3Limited Liability

1.2.4Unlimited vs Limited Liability

1.2.5Not For Profit & Franchises

1.2.6Multinational Companies

1.2.7End of Topic Test - Business Ownership

1.2.8Application Questions - Business Ownership

1.2.9Diagnostic Misconceptions - Company vs Business

1.2.10Diagnostic Misconceptions - Owners vs Shareholders

1.3Classification of Businesses

1.3.1Sectors

1.4Decisions on Location

1.4.1Location

1.5Business & the International Economy

1.5.1Globalisation

1.5.2Exchange Rates

1.6Government Objectives & Policy

1.6.1Government Objectives

1.6.2The Government & Business Activity

1.6.3Interest Rates

1.6.4Interest Rates - Calculations

1.6.5Diagnostic Misconceptions - Recessions

1.7External Factors

1.7.1External Factors

1.8What Makes a Business Successful?

1.8.1Measuring Success

1.8.2Reasons for Failure

2People in Business

2.1Internal & External Communication

2.1.1Communication

2.2Recruitment & Selection Process

2.2.1Types of Employment

2.2.2Recruitment Stages

2.2.3Effective Recruitment

2.2.4Legal Controls Over Employment

2.2.5Diagnostic Misconceptions - Internal Recruitment

2.3Training

2.3.1Training

2.4Motivation & Rewards

2.4.1Motivation in the Workplace

2.4.2Financial & Non-Financial Methods

2.4.3End of Topic Test - The Workforce

2.4.4Application Questions - The Workforce

2.4.5Diagnostic Misconceptions - Money

2.5Organisation Structures

2.5.1Organisational Structures

2.5.2Centralised vs. Decentralised Structures

2.5.3Tall & Flat Organisations

2.5.4Functional Areas Within a Business

2.5.5End of Topic Test - Org Structure

3Business Finance

3.1Sources of Finance

3.1.1Internal & External Sources of Finance

3.1.2Factors Affecting Sources of Finance

3.2Cash Flow Forecasting

3.2.1Cash Flow

3.2.2Consequences of Cash Flow Problems

3.2.3Cash Flow - Calculations

3.2.4Solutions to Cash Flow Problems

3.2.5Diagnostic Misconceptions - Cash Flow

3.3Cost & Break-Even Analysis

3.3.1Costs, Revenue & Profit

3.3.2Profit, Average Unit Cost & Interest

3.3.3Costs - Calculations

3.3.4Revenue - Calculations

3.3.5Break-Even Analysis

3.3.6Profit & Losses - Calculations

3.3.7End of Topic Test - Finance

3.3.8Grade 9 - Finance

3.3.9Diagnostic Misconceptions - Fixed Costs

3.3.10Diagnostic Misconceptions - Break-even

3.4Financial Documents

3.4.1Financial Statements

3.4.2Income Statement

3.4.3Understanding Business Performance

3.5Account Analysis

3.5.1Business Calculations

3.5.2Gross Profit - Calculations

3.5.3Net Profit - Calculations

3.5.4Business Calculations 2

3.5.5Business Calculations 3

3.5.6Liquidity

4Marketing

4.1Market Research

4.1.1Market Research

4.1.2Forms of Market Research

4.2The Market

4.2.1Customer Needs

4.2.2Satisfying Customer Needs

4.2.3Market

4.2.4The Competitive Environment

4.2.5Market Segmentation

4.2.6Market Mapping - Price vs Quality

4.2.7End of Topic Test - Marketing

4.2.8Application Questions - Marketing

4.2.9Diagnostic Misconceptions - Competition

4.3The Marketing Mix

5Business Operations

5.1Economies & Diseconomies of Scale

5.1.1Economies of Scale

5.1.2Diagnostic Misconceptions - Economies of Scale

5.2Production

5.2.1Production Processes

5.2.2Flow and Batch Production

5.2.3Production Efficiency

5.2.4Technology & Production

5.2.5Diagnostic Misconceptions - JIT vs JIC

5.3Factors of Production

5.3.1Factors of Production

5.4Quality

5.4.1Importance of Quality

5.4.2Identifying Quality

5.4.3Total Quality Management

5.4.4End of Topic Test - Operational Decisions

Jump to other topics