A fourth shop on Station Road: Lena and Marco have found the site for a fourth shop on Station Road. Before they ask a bank or anyone else, they ask: how much can the bakery find by itself?
Fitting it out, with the counter, the fridges and the shelves, will cost about $120,000.
Money a business finds from its own resources, without a lender or a new investor, is internal finance (an internal source of finance). There are three.
Money that comes from outside, from a bank or from new owners, is external finance. This page is about the inside.
Personal funds
- The owner's own money, usually savings, put into the business
- The source for a sole trader, whose savings and business are one
- Lena's first oven: $12,000 of her savings
Retained profit
- Profit the business keeps after tax and dividends, to spend on itself
- Only a business that has made a profit has any
- Lena's Bakery Ltd kept $30,000 of its 2025 profit
Sale of assets
- Selling something the business owns, such as a machine, a van or land
- Best when the thing is no longer needed
- Three old shop ovens that a dealer will buy for $18,000
Start with the oldest of the three. Three years ago, Lena opened as a sole trader with a second-hand oven. She paid for it with $12,000 of her savings and a $6,000 bank loan (1.1.4).
The $12,000 was personal funds: the owner's own money, put into her business. The $6,000 was not, because it came from the bank.
What they give (advantages)
- No interest to pay and nothing to pay back
- The owner keeps full control and all the profit: nobody else has a say
- Ready at once: there is no one to persuade and no form to fill in
- A bank is more willing to lend to an owner who has put in her own money
Where they stop (limits)
- Only as much as the owner has saved, which is rarely much
- The owner can lose her savings if the business fails
- Money in the business cannot also pay for the owner's own needs
- Once the savings are spent, this source is gone
Personal funds belong to sole traders: A sole trader and her business are the same person in law (1.2.1), so her savings are the business's money the moment she puts them in.
A company is different: Lena's Bakery Ltd is a company (1.2.3). If Lena put in more money now, she would be buying new shares in it, as Marco's cousin did. That is the company selling shares, not personal funds.
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Where the $30,000 comes from: In 2025, after paying for flour, wages, rent, interest and tax, Lena's Bakery Ltd made a profit of $60,000.
The company paid $30,000 of it to its three shareholders. It kept the other $30,000.
The profit a business keeps after paying tax and paying its owners, so that it can spend it on itself, is retained profit. The part paid out to shareholders is the dividend.
Retained profit = profit for the period − dividends
From profit to retained profit, 2025
Profit for the period: $60,000
What is left of the year's sales after every cost, the interest on the loan and the tax.
Dividends: $30,000
Paid out by shareholding: Lena (50%) $15,000, Marco (33%) $10,000, his cousin (17%) $5,000.
Retained profit: $30,000
$60,000 − $30,000 = $30,000, kept in the company to spend on itself, for example on the Station Road shop.
What it gives (advantages)
- No interest to pay and nothing to pay back
- No new owners, so Lena and Marco keep control
- No one to ask: the company decides for itself how to use it
- The cheapest source for a business that is already making a profit
Where it stops (limits)
- Only a business that made a profit has any
- Only as much as was kept: $30,000 against a $120,000 shop
- Every dollar kept is a dollar the shareholders do not get as a dividend
- Profit kept in earlier years is already spent, in the bakehouse ovens and the vans
The third limit is the one that causes arguments. Marco put his savings into the bakery and wants a return on them (1.3.4). Keep all $60,000 for the new shop and he gets nothing this year; pay it all out and there is nothing to spend. Lena's Bakery Ltd settled on half and half.
A new business has none: When Lena opened, the bakery had never made a profit, so there was nothing to retain. Her savings were the only inside money she had.
Retained profit is the source of a business that has already made profits. For a start-up it does not exist.
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Three cold ovens: Since the Mill Lane bakehouse started baking for all three shops, the old ovens in the High Street, Market Square and Park Road shops have stood cold.
A dealer in used bakery equipment offers $18,000 for the three.
Selling something the business owns to raise money is sale of assets. An asset is anything the business owns that is worth money: an oven, a van, land, a building.
It works best with assets the business no longer needs, like the three ovens. They bring in nothing, take up space and still need servicing.
What it gives (advantages)
- No interest to pay and nothing to pay back
- No new owners, so control stays where it is
- Turns something idle into money, and saves its space and upkeep
- Can raise a large sum if the asset is valuable, such as land or a building
Where it stops (limits)
- Only works if the business owns something it can spare
- The asset is gone for good, and so is the work it did
- A quick sale often fetches less than the asset is worth
- Each asset can be sold only once
The trap is selling something the business still needs. A van would fetch more than an oven. But the two vans leave Mill Lane at 5 a.m. to reach three shops before they open, and Station Road would make four.
With one van, the bread reaches some shops late and their shelves are empty at opening time. Selling an asset the business still uses cuts what it can make or deliver (its capacity).
| Internal source | What it gives for Station Road | The catch |
|---|---|---|
| Personal funds | Nothing | Not a source for a company: more money from Lena would buy new shares |
| Retained profit, 2025 | $30,000 | Needs a profit, and every dollar is one not paid as a dividend |
| Sale of the old shop ovens | $18,000 | A one-off, and a fair price only if the sale is not rushed |
| Total from inside | $48,000 | $72,000 short of the $120,000 the shop needs |
Internal finance in one line: Inside money costs no interest, needs no one's permission and brings in no new owners.
There is only as much of it as the business already has. For a project the size of Station Road, the rest has to come from outside the business.
How this comes up: Internal sources come up in short case questions and inside longer questions about paying for a project.
Where it comes up
- A short question on a case: explain one disadvantage for a named business of selling some of its assets to pay for a project, for two marks.
- How the marks go: one for the disadvantage explained, one more for showing it in the case.
- Longer questions about paying for a project: retained profit and the sale of assets the business does not need count as long-term sources, next to the external ones.
The two-mark pattern
- Name the disadvantage and say what it does. Selling a van cuts how much the bakery can deliver.
- Show it in the case. Two vans reach three shops by opening time; Station Road makes four, and with one van some shelves are empty at opening.
Three traps
- Read which sources the question wants. If it asks for external finance, retained profit and the sale of assets do not answer it.
- Read what the case says the business wants to keep. If it plans to keep its machines or buildings, selling them is not a sensible option.
- A start-up has no retained profit. Never offer it for a business that has not yet made a profit.
Explain one disadvantage for Lena's Bakery Ltd of selling one of its delivery vans to finance the Station Road shop.
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