Course: PGDFM
Paper I
Topic: Internal Sources of Finance
Teacher’s Name: Prof. (Dr.) Reyazuddin
School: Commerce and Management
Date: 05/06/2020
Internal Sources of Finance
The term internal sources of finance itself suggests the very nature of finance/capital. This is the
finance or capital which is generated internally by the business unlike finances such as loan
which is externally arranged by banks or financial institutions. The internal source of finance is
retained profits, the sale of assets and reduction / controlling of working capital.
Finance is a constant requirement for every growing business. There are several sources of
finance from where a business can acquire finance or capital which it requires. But, the finance
manager cannot just choose any of them indifferently. Every type of finance has different pros
and cons in terms of cost, availability, eligibility, legal boundaries, etc. Choosing the right source
of finance is a challenge. We need to have an in-depth understanding of the characteristics of the
source of finance. Let us focus first on the internal source of finance/capital.
RETAINED PROFITS / RETAINED EARNINGS
Retained profits/earnings are called the internal source of finance for a business for the simple
reason that they are the end product of running a business. The phenomenon is also known as
‘Ploughing Back of Profits’. Retained profits can be defined as the profit left after paying a
dividend to the shareholders or drawings by the capital owners.
