Sources of Finance: Internal & External

Sources of Finance

Internal

There is only one source of internally generated finance and that is retained profits. Profits are made when all the costs of production, including management overheads, and everything, are subtracted from all the sales revenue. 

• Retained profit
• Reduce stock levels
• Asset sales
• Tighten credit controls
• Delay paying creditors

After the tax is deducted the business can decide to do either of two things with them: (1) distribute them to the owners of the business, or (2) retain them for the future use of the business. It is these retained profits that provide the internal source of finance.

External

The company can basically either (1) sell shares; or (2) borrow finance from banks and/or other financial institutions. There are other ways in which externally generated finance can be obtained, but these are the two principle methods, and the fundamental choice facing the owners of the business. 

• Bank loan

are injections of capital, but this capital does have to be paid back, and at interest. The company does not lose control of the direction of the business, but must generate revenues and profits sufficient to pay off the loan and the interest. If the interest rate is variable, the company could expose itself to changes in interest rates, with increasing costs and a resultant profit squeeze or loss. 

• Venture/share capital

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