Finance is necessary for all businesses, from starting up a new company to upgrading capital equipment or funding expansion plans. Some of these sources are internal, and others are external. Students also need to understand the appropriateness of different internal and external finance sources.
The Most Common Source Of Funds For A Sole Trader Is Personal Savings Or Borrowing From Family And Friends. Provided These Are Not Loans, They Are Considered An Internal Source Of Initial Capital. Once the business is established, several other forms of internal finance will exist.
If A Business Makes A Profit, Some Of This Will Be Taken By The Government In Tax And A Proportion Paid Out In Dividends. Any Remaining Profits Are Retained In The Business For Investment. Ploughing Retained Profits Back Into The Business Is Inexpensive And A Significant Source Of Expansion Finance.
An Established Business May Sell Buildings, Machinery Or Even Subsidiaries To Generate Cash, If They Are Not Fully Used Or Profitable. In Addition, Firms May Sell Assets They Still Need But Do Not Necessarily Need To Own, E.G. Firms May Sell Expensive Offices In City Centres And Then Lease Them Back For An Extended Period (‘Sale And Leaseback’). In A Liquidity Crisis, Firms May Be Forced To Sell Assets They Do Need.