Factors influencing internal sources of finance.

1. FACTORS INFLUENCING
INTERNAL SOURCES OF
FINANCE

2. INTRODUCTION
One of the most important consideration for an
entrepreneur-company in implementing a new
project or undertaking expansion, diversification,
modernization and rehabilitation scheme is
ascertaining the cost of project and the means of
finance. There are several sources of finance/funds
available to any company. An effective appraisal
mechanism of various sources of funds available to a
company must be instituted in the company to
achieve its main objective.

3. Business enterprises need funds to meet their different types
of requirements. All the financial needs of a business may be
grouped into the following categories:
SOURCES OF
FINANCE
TYPE
INTERNAL EXTERNAL
TIME
LONG TERM SHORT TERM
MEDIUM
TERM

4. INTERNAL SOURCES OF
FINANCE
The various sources of internal finance for the business
includes:
 Owner’s Investment
 Retained Earnings
 Sale of Stock
 Sale of Fixed Assets
 Utilizing Working Capital More Effectively
 Debt Collection

5. RETAINED PROFITS
 This is one of the most important internal sources of
business finance.
 It represents the profits generated from sales after interest
payments to lenders, taxes to the government and
payments to shareholders in the form of dividends.
 The remaining profit is then retained or put back into the
business and available for future spending by the
organization.

6. OWNER’S INVESTMENT
 This source consists of money injected by the owners
themselves in their business.
 This is an internal source of finance that can be in the
form of start-up capital – used when the business is
setting up – or in the form of additional capital – possibly
used for business’s expansion.

7. SALE OF STOCK
 Purchase and storage costs use revenue that could
otherwise be used to expand the business.
 However, when reducing inventories enterprises should
be careful to retain the capacity to meet future demand.

8. SALE OF FIXED ASSETS
 Fixed assets are those that are not easily converted to
cash.
 Typically, these assets include equipment, property and
factories. Because these assets take time to convert to
cash, they cannot be relied on for short-term access to
finance. If you have the time, however, you could, for
example sell off some equipment or even property to
invest in your business.
 This is particularly useful if your needs have outgrown
some of your fixed assets. For example, if you need to
purchase a new equipment.

9. UTILIZING WORKING CAPITAL
MORE EFFECTIVELY
 Working capital is money tied up in the business and used
to finance its day to day needs, such as buying raw
materials.
 All businesses have a working capital cycle that identifies
how this money moves around the business.
 A possible source of finance is squeezing or reducing our
own working capital needs.
 Therefore the cash we need is more efficiently used.
 Eg: If we minimize our stock levels we reduce the amount
of money tied up in stock.

10. DEBT COLLECTION
 A debtor is someone who owes a business money.
 A business can raise finance by collecting the money
owed to them (debts) from their debtors.
 Not all businesses have debtors i.e. those who deal only in
cash.

11. FACTORS INFLUENCING SOURCES
OF FINANCE
 Purpose - What the finance is to be used for?
 Time Period - How long the finance will be needed for?
 Amount - How much money the business needs?
 Ownership and Size of the business
 A business should match the source of finance to its
specific use – in practice this means that a business
should secure long-term sources of finance for long term
uses or needs and short term finance for immediate
needs.
 The cost of the source

12.  The organization’s objectives.
 The flexibility and availability of the finance. For
example, how easy it is to switch from one form of
funding to another, or whether a particular form of
finance is available for a new business with no trading
record.
 The impact the new funding would have on the
organizations current financial structure. For example, its
balance sheet.
 The state of the external environment. For example the
economy and consumer trends.
 The type of business structure it is. For example a sole
trader or partnership can raise funds from the stock
market.