Internal Financing Sources

Internal sources of capital are those generated within the business. External sources of capital are those outside the business such as suppliers, lenders, and investors.

For example, a business can generate capital internally by accelerating collection of receivables, disposing of surplus inventories, retaining profit in the business, or cutting costs.

Capital can be generated externally by borrowing or locating investors who might be interested in buying a portion of the business.

Internal Financing Sources

Before seeking external sources of capital from investors or lenders, a business should thoroughly explore all reason­able sources for meeting its capital needs internally. Even if this effort fails to generate all of the needed capital, it can sharply reduce the external financing requirement, resulting in less interest expense, lower repayment obliga­tions, and less sacrifice of control. With a lower requirement, the business' ability to secure external financing will be improved. Further, the ability to generate maximum capital internally and to control operations will enhance the con­fidence of outside investors and lenders. With more confidence in the business and its management, lenders and investors will be more willing to commit their capital.

Basic Sources

Basically, there are three principal sources of internal capital. These are as follows:

Increasing the amount of earnings kept in the business.

Prudent asset management.

Cost control.

Increased Earnings Retention

Many businesses are able to meet all of their capital needs through earnings retention. Each year, shareholders' divi­dends or partners' drawings are restricted so that the largest reasonable share of earnings is retained in the business to finance its growth.

As with other internal capital sources, earnings retention not only reduces any external capital requirement, but also affects the business' ability to secure external capital. Lenders are particularly concerned with the rate of earnings retention, since the ability to repay debt obligations nor­mally depends upon the amount of cash generated through operations. If this cash is used excessively to pay dividends or to permit withdrawals by investors, the company's ability to meet its debt obligations will be threatened.

Asset Management

Many businesses have non-productive assets that can be liqui­dated (sold or collected) to provide capital for short-term needs. A vigorous campaign of collecting outstanding receiv­ables, with particular emphasis on amounts long outstanding, can often produce significant amounts of capital. Similarly, inventories can be analyzed and those goods with relatively slow sales activity or with little hope for future fast movement can be liquidated. The liquidation can occur through sales to customers or through sales to wholesale outlets, as required.

Fixed assets can be sold to free cash immediately. For example, a company automobile might be sold and provide cash of $5,000 or $8,000. Owners and employees can be compensated on an actual mileage basis for use of their personal cars on company business. Or if an automobile is needed on a full-time basis, a lease can be arranged so that a vehicle will be available. Other assets such as loans made by the business to officers or employees, investments in non-related businesses, or pre­paid expenses should be analyzed closely. If they are non­productive, they can often be liquidated so that cash is available to meet the immediate needs of the business.

Any of the above steps can be taken to alleviate short-term cash shortages.

On a long-term basis, the business can minimize its external capital needs by establishing policies and procedures that will reduce the possibility of cash shortages caused by in­effective asset management. These policies could include the establishment of more rigorous credit standards, system­atic review of outstanding receivables, periodic analysis of slow-moving inventories, and establishment of profitability criteria so that fixed asset investments are more closely controlled.

Cost Reduction

Careful analysis of costs, both before and after the fact, can improve profitability and therefore the amount of earnings available for retention. At the same time, cost control minimizes the need for cash to meet obligations to trade creditors and others.

Before the fact, a business can establish buying controls that require a written purchase order and competitive bids on all purchases above a specified amount. Decisions to hire extra personnel, lease additional space, or incur other additional costs can be reviewed closely before  commitments are made.

After the fact, management should review all actual costs carefully. Expenses can be compared with objectives, experience in previous periods, or with other companies in the industry. Whenever an apparent excess is identified, the cause of the excess should be closely explored and corrective action taken to prevent its recurrence.

Whether you Operate a factory, wholesale outlet, retail store, Service shop, or are a builder, you will have to sell. However good
your product is, no matter what customers think of it, you must sell to survive.

Direct selling approaches are through private sales efforts, Advertising and, for most businesses, exhibit - including the
packaging and styling of the item - in windows, in the institution, or both. Establishing a fantastic reputation with the general
public through anyhow and special services is a direct process of selling. While the latter should never be neglected, this short
discussion will be confined to direct marketing methods.

To establish Your Company on a business footing requires a Whole Lot Of competitive personal selling. You might have established
competition to conquer. Or, if your idea is new with minimal or no competition, you have the extra problem of convincing people of
the value of the new thought. Private selling work is nearly always essential to accomplish this. If you aren't a good
salesperson, seek an employee or asociate who is.

A second way to build sales is by marketing. This may be achieved Through newspapers, shopping newspapers, the yellow pages
section of the phone directory, and other published periodicals; radio and television; handbills, and direct mail. The media you
choose, as well as the message and kind of presentation, will depend upon the specific customers you would like to reach. Plan and
prepare advertisements carefully, or it will be ineffective. Most media are going to have the ability to describe the
characteristics of their audience (readers, listeners, etc.). Ever since your initial planning described the qualities of your
potential customers, you need to match these characteristics with the media crowd. If you are selling expensive jewelry, do not
advertise in high school newspapers. Should you repair bicycles, you probably need to.

Advertising can be very costly. It Is a Good Idea to place a limit upon An amount to spend, then stay within that limit. To help
you in determining how much to invest, study the operating ratios of similar businesses. Media advertising salespeople will allow
you to plan and also prepare advertisements for you. Be sure to tell them your budget limits.

A third method of stimulating sales is successful displays both in Your place of company and outside it. If you have had no
previous experience in screen work, you are going to want to examine the topic or turn the task over to someone else. Watch
displays of other companies and read books, trade publications, as well as the literature supplied by equipment manufacturers. It
could be wise to employ a screen expert for your opening screen and special occasions, or you may get the help of one on a part
time foundation. Much depends upon your kind of business and what it takes.

The proper number and types of marketing campaign to use change from business to business and from owner to owner. Some companies
prosper with low-key revenue efforts. Others, such as the used-car lots, thrive on aggressive, hoop-la promotions. In any event,
the importance of effective selling can't be over-emphasized.

On the other hand, do not Eliminate sight of your major goal - to Earn a profit. Everyone can generate a large sales volume
selling dollar bills for ninety cents. But that will not last long. Keep control of your own costs, and price your merchandise
carefully.

Record Keeping. 1 essential element of business management is the keeping of adequate records. Study after study shows that many
manager failures can result from inadequate records or the owner's failure to make use of what information was accessible .
Without documents, the businessperson cannot see in advance which way the business is going. Up-to-date records may forecast
impending disaster, forewarning one to take steps to avoid it. While extra work is required to keep a decent set of records, you
will be more than paid for the effort and expense.

If You Aren't prepared to keep adequate records - or have someone Keep them - you shouldn't try to operate a small business. At a
minimum, records are needed to substantiate:

1. Your yields under tax legislation, such as income tax and social Security legislation;

2. Your request for credit from equipment manufacturers or a loan From a bank;

3. Your claims about the business, in case you wish to market it.

But most important, you need them to run Your Company successfully And to raise your profits. Having a decent. Yet easy,
bookkeeping system you can answer such questions as:

How much business am I doing? What are my costs? Which seem to be too high? What's my gross Profit margin? My net profit? How much
am I collecting in my charge enterprise? What's the state of my working capital? How much money do I have on hand? Just how much
in the bank? Just how much do I owe my Providers? What is my net worth? That is, what is the value of my ownership of The
enterprise? What are the tendencies in my Receipts, costs, profits, and net value? Is my financial situation improving Or growing
worse? How can my assets compare with what I owe? What is the Percent of return on my investment? How many cents out of every
dollar of Earnings are net gain? Answer these and other questions by planning and studying balance sheets and profit-and-loss
statements. To do this, it is Important that you record information regarding trades as they occur. Maintain This information in a
comprehensive and organized fashion and you will be able to answer the above questions. You'll Also possess the answers to these
other vital questions About your company as: What products or services do my clients like best? Next best? Not at all? Do I take
the merchandise most frequently requested? Am I Qualified to render the services that they need most? How many of my charge
Clients are slow payers? Shall I switch to cash only, or use a charge card Charge program?

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