Internal Sources of Finance (AQA A Level Business): Revision Note

Owners' funds

• An internal source of finance is money that comes from within a business

  • Examples include owners' capital, retained profit and money generated from selling assets

• Owners' personal savings are a key source of funds when a business starts up

  • Owners may introduce their savings or another lump sum, e.g. money received following a redundancy

• Owners may invest more as the business grows or if there is a specific need, e.g. a short-term cash flow problem 

Retained profit

• The profit that has been generated in previous years and not distributed to owners is reinvested back into the business

• This is a cheap source of finance, as it does not involve borrowing and associated interest and arrangement fees

• The opportunity cost of investing the money back into the business is that shareholders do not receive extra profit for their investment

Sale of assets

Fixed assets

• Selling fixed assets which are no longer required (e.g. machinery, land, buildings) generates finance

• A sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash

  • The business sells an asset (most likely a building) for which it receives cash

  • The business then rents the premises from the new owners

    • E.g. In early 2023, Sainsbury’s announced that it was in talks to sell the prime retail property for £500 million, which will then be leased back to them by the new owners, LXi Reit

Sale of stock

• Stock may be sold at reduced prices in order to raise additional finance

• This reduces the opportunity cost and storage cost of high inventory levels

  • It must be done carefully to avoid disappointing customers if stock runs low

    • E.g. A clothing retail business holds a January sale to get rid of old stock and make space for new Spring stock

Advantages and disadvantages of internal finance