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Commerce · Ch 4 — Sources of Business Finance

Source of Generation Basis

4.3.3

Source of Generation Basis

On the basis of source of generation — that is, where the funds come from relative to the organisation — sources are classified as internal or external.

Internal sources

  • Funds generated from within the business itself.
  • A firm can generate funds internally by, for example: accelerating the collection of receivables, disposing of surplus inventories, and ploughing back (reinvesting) its profits.
  • Limitation: internal sources can meet only limited needs of the business.

External sources

  • Funds that lie outside the organisation — supplied by suppliers, lenders and investors.
  • Used when a large amount of money has to be raised.
  • They are generally more costly than internally raised funds. …