Internal Financing - India’s five year plans, Indian Economy Video Lecture | Indian Economy - B Com

internal sources of Finance
internal source of Finance is the
finance or capital
which is generated internally by the
business unlike finances such as loan
which is externally arranged from banks
or financial institutions
the internal sources of finance are
retained profits the sale of assets and
reduction or controlling of working
capital
retained profits or earnings are called
the internal sources of finance for a
business for the simple reason that they
are the end product of running a
business the phenomenon is also known as
plowing back of profits retained profits
can be defined as the profit left after
paying a dividend to the shareholders or
drawings by the capital owners formula
for retained profits or retained
earnings equals net profits minus
dividend or drawings
characteristics of retained profit are
retained earnings are a long-term source
of Finance for a company because there
is no compulsory maturity like term
loans and debentures retained profits
are also not characterized by fixed
burden of interest or installment
payments like borrowed capital
the advantage of having retained profits
or earnings is clearly seen in its
characteristics first they are long-term
finance and nobody can ask for their
payments secondly since there is no
additional equity to be issued
there is no dilution of control and
ownership in the business thirdly there
is no fixed obligation of interest or
installment payments fourthly retained
earnings as an internal source of
Finance are cost-effective considering
the fact that there is no issue cost
attached to it which ranges between two
three percent
lastly investing retained earnings in
the projects with IRR better than ROI of
the business will directly have a
positive impact the shareholders wealth
and thereby the core objective of
management will be served
another internal source of Finance is
the sale of assets
whenever business sells of its assets
and the cash generated is used
internally for financing the capital
needs we call it an internal source of
finance for sale of assets it can work
as a short term or long term finance
depending on what kind of assets are
sold say selling a car can cater
short-term and smaller finance needs and
selling land buildings or machinery can
cater to long-term and bigger finance
needs
drawback of sale of asset method is in
this type of internal source of capital
is that the benefits of useful assets
which are sold can no more accrue to the
business a possible and perfect solution
to that situation is sale and leaseback
reduction or controlling of working
capital normally a business requires two
types of finance viz long-term finance
for capital expenditure and working
capital finance for day-to-day needs
reduction in working capital can be
achieved either by speeding up the cycle
of account receivables in stock or by
lengthening the cycle of account
payables in essence both will reduce the
working capital requirement and
therefore the funds invested for working
capital can be utilized for the other
finance or capital requirements this
source has a little different analytics
this source is generated out of the
efficient management of working capital
and appropriate usage of working capital
management techniques
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