Internal finance is sum of all financial resources within the company. There are variety of sources internal to company that generate finance for the business for use of further investments, saving and managing emergency situation. Company has many options available which generate opportunity for creating internal source of finance. Internal finance save the borrowing cost of the company and shows strong financial position of the company. This position is assessed generally by analyzing balance sheet position of a company.
Ready made cash reserves available as well as cash convertibles both are internal means of financing.
Cash generated through investing activities is internal finance. When an asset is disposed by earning profit, there creates internal funds that will be consumed in purchasing any other asset or incurring on revenue generation activity to enhance results.
Funds kept as retained earnings, these are in fact that part of profit that is undistributed and kept as reserve. This reserve is maintained as meeting capital expenditure and managing Shareholders demand. Some non cash items as depreciation and interest, these are factors that save or incur cash flow in indirect way. By charging depreciation carrying value of assets is reduced and this reduced carrying value facilitates tax reduction by lawful means. Interest income is a minor amount that is received when loan is granted by company as bonds or loan notes. This investing activity generates internal funds in the form of capital as well as interest income as return.
Saving accounts or long term deposits are those sources which gives heavy amount of return by reliable bank or financial institution. These may also categorized as personal saving and investing strategy of a business man which provide a strong cushion in case of capital investment in required to grow the business or simpler aim is to multiply the surplus money with added return from the bank or financial institution.
Pension funds also facilitate the same purpose giving heavy return over a long period of time.
Being wise, businesses evaluate every capital investments in terms of the cash consumption required. This finance need is managed by taking loan. Earning through shares is another factor that is addition to internal finance and this also becomes part of capital rising when finance is needed to manage investment activity or business extension. A handsome borrowing cost can be saved, also the time and effort spent in fulfilling requirement of lender, when internal sources of finance can fulfill complete or major portion of finance need.
Few limitations of internal financing is, once consumed, no further cushion is available for the company to rely upon therefore mix of internal and external finance is preferred in case of need of finance.