Sources of Internal Finance
Funds created by the company itself, within the company, is internal finance. There are various sources for internal funding. Some companies use them to fund their business and others use them for investment.
There are various sources from which a company can raise funds internally. The sources of finance internal to organization are :
- Retained Earnings
- Accumulated Depreciation
- Advance from Customers
- Trade Credit
- Unpaid Liability
- Unpaid Dividend
- Unpaid Interest on Debentures
- Sale of an assets
“Retained earnings” is the term for describing profits which are not for investors. They are by far the best source of finance for organizations, and can be a key indicator from which you can plan your future movements.
Retained earnings are the asset of equity shareholders, and provide a reliable pool of resources that many businesses can tap into. The cost of retained earnings is a safer source for the company. They are like equity in that you don’t have to go through the hassle of finding investors. Also there is no risk as one has already the fund and there is no need to borrow any money or risk losing some.
Assets are important to all the organizations. Assets are both current and fixed. Fixed assets are set to depreciation. Depreciation is charged with the objective of funding the replacement of the fixed assets at the end of their economic life. A company may decide to use their accumulated depreciation amount towards the purchase of an asset. The accrued depreciation is a risk-free and convenient way to borrow funds when you are in need of cash.
Advance from customer
Advance received from customers can be an important internal source of finance for many large organizations. That’s because organizations who receive advance payments from their clients can often use these funds towards immediate business needs. Advance payment from customers is an important internal source of finance.
We can easily use the advance from the customers to manage the short-term obligation and working capital needs.
We call it a trade credit when a company receives goods, materials, equipment or services without making cash payment. Trade credit is also a pseudo source of internal financing. This is because there is no cash available, but you might be able to pay in cash at a later date.
Another important source of internal finance for the company is the reserves. There are many types of provisions for reserves in a company. All these reserves have a maturity condition to which company can utilize those reserves. Also, most of the companies have the statutory requirement for reserves.Reserves do not include cost as this is lying with the organization itself.
The organization has many liabilities, current and long-term, that are not payable immediately. This allows for the funds to be used for another purpose. This is a way for organizations to use unpaid liabilities as their internal source of finance
Sale of an Assets
It may happen that the organization sells a piece of equipment it no longer needs, gets rid of an old one and needs the sales money for something else. Sale of an asset can accumulate funds for the company. Company can use such funds as a supplement towards operational expenses or fulfilling its short term obligation. A company cannot raise such funds regularly and timely but this can be a source of internal finance.
Savings in transactions
Savings a pseudo source of internal finance. It can be done on account of availing cash discounts or better bargaining position. The use of savings in transactions, especially when you have cash discounts or better bargaining positions can be treated as a source of internal finance.
- Internal source of Finance for Business Organizations