Sources of finance
A business might have access to various sources of financing its needs. These sources of finance can be classified as:
Internal and external
Internal: this is money raised from inside the business. It includes
- Sales of assets: Business might sell off old, obsolete assets which are no longer used by the business to raise additional cash for the business.
Advantage | Disadvantage |
Better use of capital
|
A new business might not have any old or obsolete assets
|
- Retained profits : Businesses (especially limited companies) usually keep some part of the profit every year for future use. This is also known as ploughed back profit. Over a period of time it can total up to a huge amount which can be used for financing the business.
Advantage | Disadvantage |
Does not increase liabilities
No need to pay interest |
Not available to new businesses
|
- Reduction in working capital: Cutting the stock levels can also help the business to raise additional cash.
Advantage | Disadvantage |
Costs related to storage of stock is reduced
|
May lead to shortage of stock and loss of sales
|
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