Personal funds using the money that you personally own. Most commonly used for sole traders and partnerships.
Retained profits the profits (after tax and dividends) that the organisation keeps to use for the business.
Sale of assets firms can sell their dormant assets that have been replaced to raise capital. Examples include: old machinery, unused land or buildings etc. Sometimes, fixed assets can be sold to survive liquidity.
Frequently Asked Questions About Internal Sources of Finance
What are internal sources of finance?
Internal sources of finance are funds generated and obtained from within the business itself, rather than from external lenders or investors. These funds are typically generated through the company's regular operations.
What is meant by internal sources of finance?
It means securing capital for business operations or investments by utilizing resources that the business already possesses or generates through its activities. This includes using accumulated profits, selling off underperforming assets, or optimizing operational cash flow.
What are the main internal sources of business finance?
The primary internal sources of finance include:
- Retained Earnings (or Reserves): Profits that a company chooses to reinvest back into the business instead of distributing them to shareholders as dividends.
- Sale of Assets: Selling off assets that are no longer needed or are underutilized (e.g., old machinery, surplus land, discontinued inventory).
- Reduction in Working Capital: Improving the efficiency of managing current assets and liabilities to free up cash (e.g., reducing inventory levels, speeding up collection of receivables, stretching out payment to suppliers without penalty).
How can working capital become a source of internal financing?
Working capital can become a source of internal financing by managing its components more efficiently to release cash. For example:
- Reducing inventory: Less cash is tied up in unsold goods.
- Speeding up receivables collection: Customers pay faster, bringing cash into the business sooner.
- Managing payables: Carefully extending payment terms to suppliers without damaging relationships or incurring penalties (though aggressive tactics here can sometimes border on external financing like trade credit).
Improving these cycles means the business needs less external cash to fund its day-to-day operations.
Why is trade credit sometimes discussed in relation to internal finance?
Trade credit (where suppliers allow deferred payment) is technically an *external* source of finance, as it comes from outside the business. However, efficient management of trade payables (optimizing when to pay suppliers within the allowed credit period) is a key part of working capital management, which *is* an internal process that can free up cash internally. So, while the credit itself is external, the strategic management of it contributes to internal financial health and availability of funds.
