What are internal sources of finance?

• A. Funds from external investors
• B. Money generated within the enterprise
• C. Loans from financial institutions
• D. Savings from operational costs

Answer: (B)

Internal sources of finance refer to the funds that are generated within the enterprise itself, which can be utilized for various needs such as growth, development, or day-to-day operations. Money generated within the enterprise comes from sources like profits retained within the business, revenue from sales, and other income streams that the company creates without relying on external entities.

This concept is crucial because it emphasizes self-sufficiency; businesses can utilize their profits to reinvest in their operations rather than seeking external financing, which often comes with conditions and obligations. By using internal finances, a business can avoid interest payments and maintain greater control over its assets. Internal financing also reflects a company’s profitability and operational success, showcasing its ability to generate funds from its existing resources.

In contrast, external sources of finance include funds sourced from investors, loans from financial institutions, or funds acquired through selling shares. These options come with additional complexities and potential liabilities, which are not present when financing internally. Thus, understanding the distinction between internal and external financing is vital for effective financial planning and management within a business.