Business
Internal Sources of Finance
Internal sources of finance refer to funds that a company generates from within its own operations. This can include retained earnings, where profits are reinvested back into the business, as well as the sale of assets or inventory. Internal sources of finance provide a way for a company to fund its activities without relying on external sources such as loans or investments.
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7 Key excerpts on "Internal Sources of Finance"
eBook - PDFCapital Budgeting
Top-Management Policy on Plant, Equipment, and Product Development
- Joel Dean(Author)
- 2019(Publication Date)
- Columbia University Press(Publisher)
Chapter III SUPPLY OF CAPITAL A COMPANY , in addition to exploring and measuring its demand for capital funds, must face the problems of determining where the money will come from and how much will be avail-able. A useful distinction can be made between internal and ex-ternal sources of capital funds. The chief internal sources are depreciation charges and retained earnings. 1 External sources are principally sale of securities to insurance companies and to the public. (Term loans from financial institutions are not a source of permanent capital, since they must be paid of! by either retained earnings or later security financing. They are a means for postponing the financing problem.) In the in-ternal disposition of these funds no distinction should be made on the basis of sources of funds. In particular, the internal investment process should deal with gross rather than with net business savings—that is, with income before allowance for recovery of plant costs. In so doing, a desirable fluidity of the internal investment process is achieved. Old, dying products can subsidize the capital formation required for launching new ones by making contributions to the company's capital funds that are not earned according to a net income concept. Consequently, internal capital formation becomes more fiexi-1 In the short run there arc secondary internal sources such as sale of property or reductions in working capital that represent liquidation of existing assets. An analysis of policy for disposal of assets is discussed in the Appendix. SUPPLY OF CAPITAL 37 ble than external financing. The distinction in conventional accounting between replacement reserves and net income is a restriction on inter-company flow of capital that is not present in inter-product flows of capital within one company.
eBook - PDF- William D. Bygrave, Andrew Zacharakis(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
Getting Access to Funds—Start with Internal Sources Entrepreneurs requiring initial startup capital, funds used for growth, and working capital generally seek funds from internal sources. Managers or owners of large, mature firms, in contrast, have access to profits from operations as well as funds from external sources. This chapter is written by Joel Shulman. 444 CHAPTER 12 Debt and Other Forms of Financing Self-funding Credit cards Family Friends Suppliers Angels Commercial banks Asset-based lenders Institutions Insurance companies Venture capitalists Private equity Public equity Public debt Commercial paper Figure 12.1 Sources of outside funding: Levels of funding and firm maturity We distinguish internal from external funds because internal funding sources do not require external analysts or investors to independently appraise the worthiness of the capital investments before releasing funds. External investors and lenders also don’t share the entrepreneur’s vision, so they may view the potential risk/return trade-off in a different vein and demand a relatively certain return on their investment after the firm has an established financial track record. Figure 12.1 shows a listing of funding sources and approximately when a firm would use each. In the embryonic stages of a firm’s existence, as we’ve discussed, much of the funding comes from the entrepreneur’s own pocket, including personal savings accounts, credit cards, home equity lines, and other assets such as personal computers, fax machines, in-home offices, furniture, and automobiles. Soon after entrepreneurs begin tapping their personal fund sources, they may also solicit funds from relatives, friends, and banks. Entrepreneurs would generally prefer to use other people’s money (OPM) rather than their own because if their personal investment turns sour, they still have a nest egg to feed themselves and their families.
eBook - ePub- W.A. Thomas(Author)
- 2013(Publication Date)
- Taylor & Francis(Publisher)
8 Internal financethe regular annual investmen oy individuals intheir own businesses or properties ... must alwaysbe the most important form of saving – far moreimportant than the visible public investments .SIR ROBERT GIFFENThe volume of internal funds available to a company depends on the stream of gross trading profits and other current income, and on the sums distributed from this total in interest, dividends and taxation. The residue consists of two components: first, depreciation allowances which represent funds retained for the purpose of keeping capital assets in good working order (capital consumption), and second, net savings which represents funds available for adding to the stock of capital assets. In the case of industrial and commercial companies (see Chapter 11 for further description of this sector) the volume of internal funds available for financing working and fixed capital requirements over the post-war period has been influenced by periodic changes introduced by governments in relation to dividend payments, taxation policy and depreciation allowances. The other major influence on savings has been fluctuations in company profits associated with the regular post-war cycles.General trends in company income and its appropriation 1948–1976
Table 8.1 gives the main sources of funds for industrial and commercial companies for the post-war years, expressed as percentages of total sources, and in annual averages; the figures for 1948–51 relate in the main to companies excluding those in insurance, banking and finance, and should be treated with a degree of caution. Gross trading profits are presented after deducting stock appreciation, thus removing the influence of stock price changes from the profit figures.491 Other internal funds are derived from rent and non-trading income in the U.K., and from income earned abroad. External funds comprise capital grants made by the public sector, overseas investment in U.K. companies, and borrowing from the banks, other financial institutions, and the capital market, while a decrease in liquid asset holdings is treated as a source of funds, and an accumulation as a reduction of funds available for financing capital expenditure (see Chapter 11
eBook - PDFCapital in Manufacturing and Mining
Its Formation and Financing
- Daniel Barnett Creamer, Sergei B. Dobrovolsky, Israel Borenstein(Authors)
- 2015(Publication Date)
- Princeton University Press(Publisher)
PART II Long-Term Trends in Capital Financing BY SERGEI DOBROVOLSKY ASSISTED BY MARTIN BERNSTEIN CHAPTER VI Internal and External Financing IN this part of the report, financial trends in manufacturing and in mining over the past half-century are reviewed. Attention is focused primarily on two aspects of the financial growth of these industries. In this chapter, long-run tendencies in internal and external financing are examined and compared. In the following chapter, the various debt and equity components of external financing are analyzed, and the trends in total debt and total equity (both from internal and external sources) are compared. At the outset, however, the basic concepts should be discussed and some technical terms defined. Concepts and Definitions It has become customary to refer to funds obtained through income retention as "internal financing." The amounts so designated will differ depending on the degree of netness or grossness desired. Here, "net income retention" (or net internal financing) will designate the undistributed net profit remaining in the business after dividend pay- ments. "Gross income retention" (or gross internal financing) will denote the amount of undistributed net profit plus depreciation and depletion allowances. 1 "External financing," will refer to funds ob- tained through new capital stock issues (external equity financing) and through various types of loans, e.g., bond issues, mortgages, bank loans, trade credit, etc.
eBook - ePub- William D. Bygrave, Andrew Zacharakis(Authors)
- 2015(Publication Date)
- Wiley(Publisher)
Entrepreneurs at small, growing firms, unlike finance treasurers at most Fortune 500 companies, do not have easy access to a variety of inexpensive funding sources. In the entire world, only a handful of very large firms have access to funding sources such as asset-backed debt securitizations, A-l commercial paper ratings, and below-prime lending rates. Most financial managers of small- to medium-size firms are constantly concerned about meeting cash flow obligations to suppliers and employees and maintaining solid financial relationships with creditors and shareholders. Their problems are exacerbated by issues concerning growth, control, and survival. Moreover, their difficulty in attracting adequate funds exists even when firms are growing rapidly and bringing in profits (this is explored later in the chapter). However, when financing from external sources such as banks dries up, as it did during the economic recession in 2008 and 2009, the consequences are sometimes fatal for small companies. Entrepreneurs must be efficient with their working capital and keep external capital needs to a minimum; they need to be self-sufficient and grow within their means. Otherwise, they won’t survive.This chapter describes various financing options for entrepreneurs and identifies potential financing pitfalls and solutions. It also discusses how these issues are influenced by the type of industry and life cycle of the firm and how management should plan accordingly.Getting Access to Funds—Starting with Internal Sources
Entrepreneurs requiring initial start-up capital, funds used for growth, and working capital generally seek funds from internal sources. This contrasts with managers or owners of large, mature firms that have access to profits from operations as well as funds from external sources. We distinguish internal from external funds because internal funding sources do not require external analysts or investors to independently appraise the worthiness of the capital investments before releasing funds. Moreover, since external investors and lenders do not share the entrepreneur’s vision, they may view the potential risk/return trade-off in a different vein and may demand a relatively certain return on their investment after the firm has an established financial track record.Exhibit 8.1
eBook - PDF- Trevor Gambling, R Brown, G. Chandler, W. A. Davis(Authors)
- 2016(Publication Date)
- Pergamon(Publisher)
To finance a long-term shortage of funds from a short-term source will place the firm at some future date in the position of having to raise yet another loan in what may be rather difficult circumstances, namely with no more attractive proposition to offer to investors than to be substituted for another set of existing creditors. Similarly, a short-term requirement financed from a long-term source will leave the firm with surplus funds, which will still perhaps be bearing interest; unless such a surplus can be reinvested, the presence of an unduly high proportion of liquid assets combined with low profits may make the company especially vulnerable to a 'take-over bid'. 80 A ONE-YEAR ACCOUNTING COURSE PART II Short-term finance are those items normally grouped on the balance sheet as current liabilities and they are a rather neglected source of funds as far as many companies are concerned. What has been said about the flow of funds statement and the various ratios has demonstrated that considerable amounts of additional capital could be made available in any case where it was possible to extend the company's credit (i.e. by taking longer to pay) or by making more effective use of the current assets (i.e. by collecting debtors' accounts more quickly, or employing the stocks more effectively). However, from the point of view of investment decision-making most authorities prefer to treat this aspect of finance as a net alteration in the working capital, which reflects itself in the cash-flow figures ; for this reason only long-term sources will be covered here in very much detail. External Sources 1. An issue of ordinary share capital When one talks of an issue of shares it must normally be taken as an issue of shares by a public company whose shares are dealt with on a stock exchange. Clearly other companies, for the most part private companies, can and do issue shares but such issues can be considered more as investments or deposits made by private individuals.
eBook - PDF- Andrew Zacharakis, William D. Bygrave(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
338 The success of Wayfair, the e-commerce home goods reseller, was not only due to their clever target marketing and web analytics, but from a business model that relied upon an efficient cash conversion cycle. Photo Credit: M4OS Photos/Alamy Stock Photo This chapter was written by Joel Shulman. 11 Debt and Other Forms of Financing 339 Getting Access to Funds—Start with Internal Sources Entrepreneurs at small, growing firms, unlike finance treasurers at most Fortune 500 companies, do not have easy access to a variety of inexpensive funding sources. In the entire world, only a hand- ful of very large firms have access to funding sources such as asset‐backed debt securitizations, A‐l commercial paper ratings, and below‐prime lending rates. Most financial managers of small‐ to medium‐sized firms are constantly concerned about meeting cash‐flow obligations to suppliers and employees and maintaining solid financial relationships with creditors and shareholders. Their prob- lems are exacerbated by issues concerning growth, control, and survival. Moreover, the difficulty of attracting adequate funds exists even when firms are growing rapidly and bringing in profits. This chapter describes various financing options for entrepreneurs and identifies potential financing pitfalls and solutions. We also discuss how these issues are influenced by the type of industry and the life cycle of the firm and how to plan accordingly. Getting Access to Funds—Start with Internal Sources Entrepreneurs requiring initial start‐up capital, funds used for growth, and working capital gen- erally seek funds from internal sources. Managers or owners of large, mature firms, in contrast, have access to profits from operations as well as funds from external sources. We distinguish internal from external funds because internal funding sources do not require external analysts or investors to independently appraise the worthiness of the capital investments before releasing funds.
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