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19: Business finance: needs and sources
Internal sources of finance
This is capital which can be raised from within the business itself. Th ese include:
Unincorporated: see
Chapter 4, page 48.
Owner’s savings
Use of some of
the business’s Internal Retained profits
working capital sources of finance
Sale of non-current
assets such as
equipment and
machinery
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Figure 19.1 Internal sources of finance
KEY TERM Retained profits
The owners of a profitable business may decide to reinvest some of their profi ts
Retained profit: profit in the business instead of taking the profits themselves. This source of fi nance is
remaining after all expenses, tax
known as retained profi ts. Once a business has paid all of its business expenses,
and dividends have been paid.
Profit which is ploughed back into including interest on borrowing and taxation, then the profit remaining belongs to
the business. the owners. Usually, owners receive part of the profits as dividends and the rest is
reinvested back into the business.
The distribution of after tax profit between dividends and retained profi ts is
shown in the appropriation account of a company’s income statement.
Extract from Company Y’s Income Statement
Appropriation Account
$m
Profit after tax 13.6
Dividends 7.8
Retained profit 5.8
In the above example Company Y had $13.6m profi t after paying tax. Th is amount
belongs to the shareholders as they are the owners of Company Y. However, instead
of distributing all of this profit to the shareholders as dividends, the company
decided only to pay dividends of $7.8m. The balance, $5.8m, is kept as retained
profi t. This amount becomes a source of internal finance for the company which
management can use to fund capital expenditure projects.
