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What is Internal Finance?

A simple definition of what is internal finance is “the money that a company uses to make purchases”. In the broadest sense, internal finance is the spending of a company’s assets or profits as a medium of borrowing money to finance an additional investment or project. Internal sources of finance unlike external sources of finance do not have the same constraints that are applied to public sector finance. These days, internal finance is an important part of any organisation’s strategy.

To explain what is internal finance in a simple terms, internal finance includes all the financial activities and expenses of a company that are undertaken in the course of its business operations. This could be purchasing of goods and services, purchasing of raw materials, employing people for working, equipping the building or plant with essential equipment and so on. The buying of non-financial assets like buildings, land and forests is also an aspect of internal financial control. The aim of all these financial activities is to make profit for the company.

What is internal finance example shows that a company will employ a large number of people to carry out these activities. Thus, it is obvious that the company will have to take care of its employees by providing them with the remuneration they deserve. In order to maintain a good image in the customers’ eyes, the company would want to ensure that all its employees are paid their due. The importance of internal financing can hardly be stressed in such a scenario.

So, what is internal finance? Internal finance allots a specified percentage of the total assets of the company as reserve against the liability of the company. In other words, it works out the working capital of the company. This form of internal financing also ensures that the company does not run short of funds as it is dependent on it for ensuring smooth operations. An important thing to note is that, if the reserves fall short of the requirement, then the working capital comes down hence creating a situation of financial instability for the company.

As already explained above, the whole concept of internal financing can be traced back to the ancient Roman and Greek economic philosophies. In those days, it was considered sacrosanct that the wealth of the a company should not be dependent upon the whims and fancies of the entrepreneurs. That is the reason why, in spite of the fact that there were no global trade goods during those days, the entrepreneurs did not risk their capital in ventures which had not been thought of as profitable enough. Thus, the role of internal financing plays a crucial role today in ensuring that the business firm is not doomed to fail.

What is internal financing? Today, many banks and other lenders have taken steps to adopt this methodology of finance example. The first step towards internal financing is to identify the areas that require funds and initiate an analysis of the losses incurred by the organization. Based on this analysis, the amount of the required funds is determined and the company is asked to raise a separate finance plan for the same.

A major part of what is internal finance is concerned with the assets of the company. Once these are identified, the managers develop a balance sheet by adding together the value of all the assets of the company. These assets can be included in the books of accounts as operating finance or fixed assets. Since the company will need to raise additional funds to finance its activities, the managers will also have to decide whether to use internal mechanisms to raise the money or whether it would be more profitable to use external resources.

There are many sources from where one can learn about the various internal finance examples in the news. However, one must take care not to become over-enthusiastic about any such organization. Internal finance is a very serious area and one must only look at the facts objectively rather than forming an opinion based on hearsay. By keeping a track of the major financial statements of such companies over a period of time, one will be able to see a trend of consistent profitability and growth. One can make use of various financial calculators for this purpose and learn what is internal finance in a better way.

What is Internal Finance?

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