Edexcel International

A Level Business
2.3.1 Planning a business and raising finance
2 INTERNAL FINANCE
Revisionstation
Worksheet
Starter – Wpouild you like a TV like this?

Guess how much it costs? IN

Dollars
Activity

Q1. What could you do to

raise the money to buy this
must have TV. List your
options

Q2 – Categories them as
Internal or External Sources
of Finance
From the specification

a) Owner’s capital: personal savings.

b) Retained profit.
c) Sale of assets.
Finance Defined
• 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)
Reasons for raising finance
A. To pay debts, this is likely to be a consolidation loan
which may pay off suppliers
B. To help a business over a slow trading period -
overdraft
C. To expand: a business may apply for long term finance
such as a loan
D. To start-up a business may apply for a loan with a
business plan or ask friends and family to invest
E. To buy stock: a business would ask a supplier for trade
credit, typically 30, 60, 90 days
Owner’s capital: personal savings
Owners capital
• This is also sometimes called owners 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
When is owner’s capital appropriate?
• Sole traders and partnerships would be
the two business forms which would
mostly use owner’s capital to expand and
to grow
• Not just used at the start up stage
• Typically no interest to pay

• Kelli, 37, and Laura, 33, who have no

previous experience of business, created
the refillable, roll-on, mess free
sunscreen applicator with product design
students at Cardiff Metropolitan
University.
Retained profit
Retained profits
• After a year or more of trading a
business may have some profits that
they are able to re-invest into the
business to help it grow.
• The advantage of retained profits is
there is no interest to pay
• The disadvantage is once retained profit
is used it has gone and cannot be used
elsewhere in the business Kath Kidston, she started her
empire from a small shop in
London
When is retained profit appropriate?
• 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
• For Limited companies the more retained profit
used the less dividends are available
• The business may have made a loss and therefore
will also not have any retained profit
• RP has flexibility it doesn’t have to be used
immediately it can sit in a bank account and earn
interest
Sale of assets
Sale of assets
• A business can raise finance by selling
items that they already own
• This could be:
• Machinery
• Land
• Premises
• 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
Sale and Leaseback
• Sales and Leaseback
• Involves selling an asset to raise
money such as machinery or
property that the business needs
then leasing it back so it can
continue to be used
• Can raise instant cash and
responsibility for repair and
maintenance passes to the new
owner
When is the sale of assets appropriate?
• All types of business can sell • When a business is growing it
their assets, except those that may need to raise cash fast to be
have just started up able to continue to trade
• Assets (like a van) can be sold
• This may not raise enough quickly (same day) for cash
money for growth or expansion

• Also, how well run is the

business if they need to sell their
assets to expand
Advantages and Disadvantages of Using Internal Finance
Advantages Disadvantages
• Capital available immediately • Int Fin can be limited, a business may not
be sufficiently profitable to use RP or have
• Int Fin is cheap, with no interest unwanted assets to sell
payments which reduces costs and • Int Fin cannot be subtracted from business
make profit margins higher profits to reduce tax owed unlike External
• In addition, there are no Finance which is treated as a business cost
administration costs and subtracted from profits to reduce the
tax burden
• The business will not be subject to
• The opportunity cost for using Int Fin e.g.
credit checks, external finance
PLC may have to consider the shareholder’s
often requires investigations into reaction if dividends are frozen or cut
the credit history of the borrowers
• No need to involve third parties
Sample practice questions
Case study
for
question 1
 Sample question 1 Old IAL
spec
s a m p le
q u e s tio n s

Level 1 Level 2 Level 3 Level 4

1-2 3-4 5-6 7-8
Answer
sample
question
1
Glossary
• Owners capital; this is the money invested by the owner in the
business, this may have come from their own personal savings
• Retained profit; this is profit from a previous year that is saved and
could be used to reinvest into the business
• Asset; this is an item that the business owns that could be sold to
raise cash e.g. a van, a machine