p4 describe sources of internal and external finance for a selected business m2
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Business
Unit 2 - Working in business
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Learning Outcome 3: Know how to access sources of finance
P4 – Describe sources of internal and external finance for a selected business/
M2 – Analyse the advantages and disadvantages of a range of different sources of finance
for a selected business
Internal sources of finance:
Retained profit – Businesses that are successful in their industry will at some point reach a
point where the company is making profit. Retained profit that the business leaves a very
flexible choice for the business; the money gained for profit can be put back into the
business in order to expand however the money can also be kept in the bank of the owner
of the business. Depending on the size of the profit of that the business is making the
owner has the choice of doing both (putting money back into the company to expand or
keep the profits for personal use).
Sainsbury’s displays many of their financial statements and sectors of their financial situation
each year, however their retained profit section has been labelled as ‘n/a’. Although they
have not stated their exact values of their retained profit these records show as that
Sainsbury’s will have retained profit and do take it into account like many if not all other
businesses.
An advantage of retained profit is that when the business is in need of improvements, new
equipment or just general growth the company must find available funds that are to be
spent..
A disadvantage of retained profit is that the higher the rate of income (that the business
receives) the higher percentage of tax the company is required to pay. Retained profit is
subject to taxation just as much as the various other savings and income that the business
has.
, Savings – Savings within a business is similar to retained profit but the savings accounts are
mainly back up for the business as well as personal use for the owner of the business. The
money that will be put in these accounts, will all be profit from which is received from the
businesses’ income.
Sainsbury’s produce
various financial sectors
of their business online in
a report. This is done
yearly and is shown over
a five-year period on a
chart. This displays their
savings over the years
and how they varied.
From the chart I
understand that the business has over time not made as much savings as overall their total
savings have dropped since ‘2007/08’. Sainsbury’s claimed in their report that they ‘have
achieved over £100 million of operational cost savings over the year, taking the total to
almost £600 million of cost savings over five years’; this shows that they care a lot about
their financial savings ensuring they keep the figures rising.
An advantage of savings in a business is that it creates an option for available capital. A
smaller business has the ability to invest their own savings into a business tax free and whilst
having not payback interest where as if they had taken a loan out for the business they
would have to pay the bank back the money they loaned as well as interest on top of the
original loan.
A disadvantage of saving too much means there are less funds to invest in other projects.
This may also put a strain on their cash flow.
External sources of finance
Overdraft – A company can use an overdraft from a bank to gain extra funding for financial
projects and pay it back at a later date. This overdraft will have a limit, which is set by the
bank, the bank also decides whether a person has the permission for an overdraft. This is
because companies or people with bad credit ratings will not be granted permission by the
banks for an overdraft as the bank has no guarantee that they will get the money back.
A company such as JD Sports would not use overdraft as part of their financial efforts with
the company. This is because if they were to go into overdraft the interest rates would less
favourable than an agreed loan. There are essentially no advantages of an overdraft for JD
Sports as their overdraft would result in major depletes in their retained profit.
A disadvantage of JD Sports using an overdraft is the obvious major interest they would be
subjected to. Unlike a personal overdraft which would not normally be more than 5
thousand pounds, a company the size of JD Sports would suffer as they could reach millions
of pounds of which they would have to owe back.
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