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Flip to reveal answersInternal finance comes from ______ the business.
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All 25 Flashcards — Internal sources of finance
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Question
Internal finance comes from ______ the business.
Answer
Within.
💡 Hint
Inside the business.
Question
How does selling assets provide finance?
Answer
The business sells unwanted or underused assets to raise cash (e.g., old machinery or vehicles).
💡 Hint
Sell assets for cash.
Question
How does reducing stock levels raise finance?
Answer
Selling excess inventory frees up cash that was tied up in unsold goods.
💡 Hint
Free cash from stock.
Question
Define retained profit as a source of finance.
Answer
Retained profit is the portion of net profit kept in the business for reinvestment rather than paid out to owners/shareholders.
💡 Hint
Profit kept inside.
Question
Define internal sources of finance.
Answer
Internal sources of finance are funds raised from within the business itself, without using external lenders or investors.
💡 Hint
From inside the business.
Question
State one disadvantage of raising finance by selling assets.
Answer
The business loses the asset permanently and may reduce capacity; it may also receive a low price in a quick sale.
💡 Hint
Lose asset / low price.
Question
State one advantage of internal finance.
Answer
It does not increase debt or interest payments and does not dilute ownership.
💡 Hint
Low risk.
Question
State one advantage of retained profit.
Answer
No interest is paid and ownership/control is not diluted.
💡 Hint
No interest, no dilution.
Question
What is tighter credit control?
Answer
Improving the speed of collecting money owed by customers (trade receivables) to increase cash inflows.
💡 Hint
Collect debts faster.
Question
Retained profit is the most common internal source for ______ businesses.
Answer
Established.
💡 Hint
Needs profits.
Question
State one disadvantage of internal finance.
Answer
It is often limited in amount and may be insufficient for large investments.
💡 Hint
Usually limited.
Question
State one method of improving credit control.
Answer
Send invoices promptly, set clear payment terms, and follow up late payments quickly.
💡 Hint
Chase payments.
Question
What are personal funds as a source of finance?
Answer
Personal funds are the owner’s own savings invested into the business (common for sole traders and partnerships).
💡 Hint
Owner savings.
Question
Selling assets raises cash but the business loses the ______ permanently.
Answer
Asset.
💡 Hint
One-off source.
Question
State one disadvantage of retained profit.
Answer
It is only available if the business is profitable and may be limited.
💡 Hint
Needs profit.
Question
Why do many businesses prefer internal finance first?
Answer
Because it is cheaper and lower risk than external finance, and it avoids giving up control to outsiders.
💡 Hint
Cheaper + control.
Question
Personal funds are especially common for ______ traders.
Answer
Sole.
💡 Hint
Owner savings.
Question
State one advantage of using personal funds.
Answer
No interest or repayments are required and it shows commitment to the business.
💡 Hint
No repayments.
Question
Why might shareholders dislike heavy use of retained profit?
Answer
It may reduce dividends paid to shareholders in the short term.
💡 Hint
Lower dividends.
Question
Why are internal sources often described as low-risk?
Answer
They do not increase debt/interest and do not dilute ownership or control.
💡 Hint
No debt, no dilution.
Question
Which is usually larger: internal or external finance?
Answer
External finance usually provides larger amounts than internal finance.
💡 Hint
External = bigger.
Question
Can a start-up usually use retained profit?
Answer
No. Start-ups usually have no retained profit because they have not made profits yet.
💡 Hint
No profits yet.
Question
Why can internal sources be insufficient for large projects?
Answer
Because the amounts raised internally are often limited and may not cover major capital investments.
💡 Hint
Limited amounts.
Question
Exam skill: Why can’t a start-up use retained profit?
Answer
Because it has not made profits yet, so there is no profit to retain.
💡 Hint
No profits yet.
Question
State one limitation of personal funds.
Answer
The amount is limited to the owner’s savings and increases personal financial risk.
💡 Hint
Limited + personal risk.
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Topic 3.2 hub
Sources of finance
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