Retained Profit

This is the profit that a business keeps after all expenses, taxes and shareholder
dividends have been paid. This source of finance is available to most organisation
types except fresh start-ups; this is because they have not yet made enough (or any)
profit.

 Advantages of retained profit include:

 If a business were to apply for a bank loan, they would need to provide
reports and data on their activities. Since the business already earned the
retained profits, no one will need to ask them for confidential
information.
 Investment of retained profits can lead to development of a business to
the point of it appearing more valuable than before. This would help
increase the value of the business’s shares, making more money for investors, and potentially attracting
further investment.

 Disadvantages of retained profit include:

 If a business makes a considerable amount in retained profits, shareholders may start to wonder why they
are not receiving higher dividends. This can lead to de-investment from unhappy shareholders and a
potentially negative image for the business.
 There is an opportunity cost to be considered: a business might be deciding between investing their
retained profits or saving them in order to generate a healthy amount of interest. If the owners decide to
invest their retained profits, they must be sure that they are going to make more money from developing
their business than the interest they could have made by saving the profits.
Sale of Assets
This involves a business selling off their possessions, such as property or vehicles, in order to generate finance. This
source is available to most business types, except new start-ups since they generally will not have any assets that they
can afford
to sell.

 Advantages of sales of assets include:

 It allows businesses to focus their funds on developing themselves, rather than keeping money locked up
in assets
 Unlike a bank loan, for example, the finance is freely available to the business; all they need to do is sell
the asset

 Disadvantages of sales of assets include:

 An asset is no longer an asset once it is sold; if a business still needs access to a factory, for example, but
has already sold its asset, it will need to pay rent on a property. Essentially, this turns a business’s asset
into a cost.
 The business needs to be sure that the asset is worth less to it than the potential earnings it could make
with the now-available cash. This is a risk for any business.

2.1.1. Questions

1. Identify and explain one advantage and one disadvantage for businesses using the following methods of
?
finance:
a. Personal savings
b. Sale of assets
c. Retained profit

1. Sale of assets.
One advantage of sale of assets would be that instead of keeping their money in assets (something of value that
the business owns) the business would re-invest the money back into the business or keep as profit, allowing it to
expand and become bigger and more well known.
On the other hand a disadvantage would be if the asset is sold it has to be worth less to the business than the
potential cash that will come from it to expand the business. If the asset is worth more to the business than the
cash is then the asset should not be sold because if it is then it will be a loss of potential profit.