Compare internal sources of finance
Compare owners' investment, retained profit, asset sales and working capital as internal sources, including their limits.
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which is an internal source of finance?
What you will learn
- Identify internal sources
- Explain advantages and disadvantages
- Distinguish retained profit from revenue
Internal sources come from within the business or its owners
Owners' investment adds funds from the people who own the business. Retained profit is past profit kept in the business instead of distributed. Selling unwanted assets can release funds tied up in items the business no longer needs.
Working capital can be a source when better stock or receivables management releases cash. This does not mean working capital is always spare cash: reducing essential inventory or delaying necessary payments can create operational problems.
Internal finance has limits
Internal sources may avoid interest or lender approval, but funds may be insufficient or have another use. Owners' investment depends on owners' ability and willingness to contribute; retained profit depends on prior performance.
Selling assets can weaken capacity if an item later proves useful. A business should consider the cost of losing the asset and the reliability of the released funds, not just the immediate cash amount.
Pause and explain
Why may retained profit not be immediately available to spend?
Worked example
A small firm has retained profit of $12,000 and an idle delivery van it can sell for $4,000. It needs $10,000 for a website and inventory. Compare these internal sources.
Show the worked solution
- Retained profit could fund the need without borrowing, if it is available as cash.
- Selling the unused van could release additional funds.
- Check whether the van may be needed again and whether the retained profit is already tied up.
Answer Retained profit may provide $12,000 without a lender, but accounting profit is not necessarily cash available now. Selling the idle van may add $4,000, provided the firm does not need its delivery capacity and the sale proceeds are realistic.
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Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A partnership wants to buy a $9,000 machine. Partners can contribute $4,000 and the business has $6,000 retained profit. Give one advantage and one check before using these internal funds.
Give me a hint
The source may avoid an external lender, but the funds might already support operations.
Compare my reasoning
- Owners' investment and retained profit total $10,000 in principle.
- Check whether retained profit is available as cash.
- Consider whether owners' contributions alter their financial exposure or agreement.
The partners could raise the $9,000 internally, potentially avoiding interest and lender conditions. They should confirm the retained profit is liquid and that using it will not leave the business short of working capital; the partners should also agree how their contributions are treated.
Look for these in your work
- Sources combined correctly
- Liquidity checked
- Partner context considered
A shop plans to sell a spare display freezer to raise cash. Explain one benefit and one possible disadvantage.
Give me a hint
Selling an asset releases funds but removes future use.
Compare my reasoning
- The sale may release cash without a loan repayment.
- The freezer could be useful during seasonal demand.
- Compare likely sale proceeds with the cost of replacement or lost capacity.
Selling the spare freezer could raise cash without interest or scheduled repayments. If seasonal demand later requires it, the shop may face rental or replacement costs; it should compare those with the proceeds.
Look for these in your work
- Benefit stated
- Opportunity cost explained
- Comparison recommended
A firm reports a large profit but has few bank funds because customers have not paid yet. Explain why it should not assume retained profit can cover a bill due tomorrow.
Give me a hint
Profit is measured over a period; cash depends on when receipts and payments occur.
Compare my reasoning
- Sales may be recorded before cash is received.
- The profit may be held in inventory or receivables.
- Compare cash available with the bill's due date.
Retained profit is an accounting measure and does not prove that cash is available today. The firm's funds may be tied up in receivables or inventory, so it should review its cash position and expected receipts before the bill falls due.
Look for these in your work
- Profit distinguished from cash
- Working-capital link
- Due date considered
Common mistakes
- Treating retained profit as guaranteed cash
- Selling productive assets without considering future use
- Assuming internal finance has no opportunity cost
What can you explain now?
Which is an internal source of finance?
Compare with the explanation
Retained profit
It is profit kept within the business.
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Make it stick
Name two internal sources of finance and one constraint on each.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.