Page 250 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

The amount available from retained profits is likely to be higher for a
multinational company than it is for a sole trader. Nevertheless, it remains a very
important source of finance for businesses of all sizes and types.

The main benefit of using retained profits is that there is no cost to the business. Th e

Appropriation account: see profits have been earned through its trading activities. However, the main limitation of
Chapter 21, page 274. this source of finance is that it is only available when the business is profitable. If profi ts

are low then there will not be enough retained profits to fund large investment projects.

If the business makes a loss, then there will be no retained profit for reinvestment.

Sale of non-current (fixed) assets

This is another possible source of internal finance. A business may be able to raise

finance through the:
■ sale of unwanted non-current assets
■ sale and leaseback of non-current assets, for example selling land and buildings
owned by the business and then renting this back from the new owner.
ACTIVITY 19.2

Discuss with a classmate why:

1 The sale of an unused building is likely to raise more money than the sale of a piece of machinery.
2 The sale of a three-year-old motor vehicle is likely to raise more money than the sale of ten three-year-old computers.
3 The sale of a very large item of machinery which cost $1m when bought new three years ago might only raise a much
248 smaller sum of money if sold today.

The main benefit of this source of finance is that it has no direct cost to the

business. However, it depends on whether the business has unwanted assets to sell
and there is someone who wants to buy them.
Sometimes non-current assets, such as machinery, have a very specialised

purpose. They have no commercial value except for as scrap metal. If so, then the
sale of such assets is unlikely to raise a lot of money. However, unwanted land or
buildings are likely to be much more commercial. Buyers will be easier to find and a

lot of capital can be raised.
Sometimes the business sells a non-current asset – usually land and
buildings – and then leases the asset back from the new owner. This is known
as sale and leaseback.

Th e benefits of raising finance through the sale and leaseback of non-current

assets such as land and buildings include:
■ there is no direct cost to the business
■ it can often raise very large amounts of money.

The limitations of this method of raising fi nance include:

■ future fixed costs of the business will increase as they now have to pay annual
leasing charges to the new owner
■ leasing charges are likely to increase each time the lease is renewed
■ when the leasing agreement comes to an end the business may have to find new
premises if the new owner decides that they want to use the land or buildings for
other purposes.