U4.05 — Sources of Internal Funding
Overview
Dotpoint 5: sources of internal funding.
Internal funding refers to money generated from within the business rather than borrowed or raised from outside the business. The key internal source in this dotpoint is retained profits.
Internal funding can be useful for global expansion because it allows a business to reinvest its own profits into new markets without immediately relying on banks, finance companies, investors or government funding.
There are various forms of internal finance, but this syllabus focuses on one key source: retained profits.
💰 Retained profits
What are retained profits?
Retained profits are profits kept in the business after expenses, tax and owner distributions or dividends have been paid.
Instead of distributing all profits to owners or shareholders, the business keeps some of the money and reinvests it into future operations, growth or expansion.
Impact on global business expansion
Retained profits can help a business expand globally because they provide a source of funding that comes from inside the business. This means the business does not need to immediately borrow from a bank, take on debt or give up ownership to investors.
For example, retained profits could be used to fund market research, international marketing, website upgrades, staff training, travel, stock purchases, equipment, deposits, or the early setup costs of entering a new overseas market.
However, retained profits may be limited. If the business has not made enough profit, it may not have enough internal funding to cover major expansion costs such as warehouses, stores, machinery or international logistics.
How retained profits can be used
Market research
A business can use retained profits to research overseas customers, competitors, prices, culture and demand before entering a new market.
Marketing and promotion
Retained profits can fund international advertising, website upgrades, social media campaigns and promotional material.
Inventory and equipment
A business may reinvest profits into stock, equipment, machinery, technology or production capacity needed for overseas growth.
Benefits and limitations of retained profits
| Benefits | Limitations |
|---|---|
| No interest repayments, so the business avoids extra debt and protects cash flow. | The amount available depends on how profitable the business has been. |
| The business keeps control because it does not need to bring in new investors. | Using retained profits may reduce money available for owners, shareholders or other business needs. |
| Can be quicker to use than applying for a bank loan or negotiating with external investors. | May not be enough for large global expansion projects such as overseas warehouses, production facilities or store networks. |
Retained profits compared with external funding
Internal versus external funding
Retained profits are an internal source of funding because the money comes from profits already generated by the business.
In contrast, external funding comes from outside the business, such as banks, finance companies, share capital, venture capital, trade credit, debentures, secured loans or government grants.
For global expansion, retained profits are often suitable for smaller or early-stage costs, while external funding may be needed for larger projects.
Example of how to write this in an exam
Retained profits are profits kept in the business after expenses, tax and owner distributions or dividends have been paid. For example, an Australian business such as Breville could reinvest retained profits to support overseas expansion by funding product launches, marketing and distribution in international markets. This is useful because the business can grow without immediately taking on debt or giving up ownership, although retained profits may still be limited if the expansion is large and expensive.
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💰 BME Millionaire
Climb the money ladder by mastering internal funding and retained profits.
Biz Fact: Apple has built up hundreds of billions of dollars in profits over time, giving it the firepower to fund new products, stores and global expansion without needing to borrow every time.
Past Exam Questions
Use these past exam questions to see how this dotpoint has been assessed. Pay close attention to the command term, the number of marks and whether the question is Section 1 or Section 2.
Section 1 Questions
2017 — Section 1 — Question 4(c) — Internal finance part only — 2 marks
Context
Business operation in global markets requires knowledge of different business practices and legal systems.
4(c): Describe one source of internal finance available to Australian companies. (2 marks)
Command term focus: Describe
Describe: give the main characteristics or features of the internal funding source.
See the full command term guide here: Command Terms.
4(c) Sample answer
One source of internal finance is retained profits. These are profits kept in the business after expenses, tax and distributions have been paid, which can then be reinvested into operations or expansion without borrowing from an external lender.
2022 — Section 1 — Question 3(b) — 2 marks
Context
Finance is an important aspect for a business to consider when starting up or expanding.
3(b): Outline the meaning of ‘retained profits’. (2 marks)
Command term focus: Outline
Outline: state the main point and briefly clarify what retained profits are.
See the full command term guide here: Command Terms.
3(b) Sample answer
Retained profits are profits kept in the business after expenses, tax and owner distributions or dividends have been paid. They can be reinvested back into the business to fund operations, growth or expansion.
Section 2 Questions
2025 — Section 2 — Question 7(c) — Internal funding part only
Case study / context
SNO Tours is a Western Australian-based travel and tourism proprietary limited company. It has built a presence in the Australian market by providing unique small-group holiday experiences, focusing primarily on adventures with friends. Its target market is people aged between 18 to 25 who want to explore and are open to trying new things. The business model operates on the needs and wants of clients, including their budgets and preferred adventure activities. With a thriving client base and strong social media following, SNO Tours is considering expanding its tour offerings to include countries in Asia, specifically Japan.
SNO Tours feels Japan is a suitable starting point for small-group adventures as there are favourable economic conditions for both the business and its clients. With the Japanese yen (JPY) being weak compared with the Australian dollar (AUD), Australians visiting Japan can spend more on experiences while away. Compared to travel experiences in Australia, SNO Tours’ clients will be able to do more during their Japanese holiday, including affordable skiing holidays, visits to many cities and experiences of local culture. The relationship between the Australian and Japanese governments is positive and it is a safe and stable country for travel.
While the SNO Tours’ team is excited for this expansion, they are also aware that they will need more money to finance it. They have recorded a profit for the year, resulting in some retained profits, but will need to consider external sources of funding to make their dream a reality.
SNO Tours is well aware of the ethical implications of its industry. It has always held itself to high standards and all clients agree to a responsible travel agreement. It prides itself on its respect for local culture and will continue to do so. With expansion into international travel, it will be further considering its corporate social responsibility and how it can best operate in the travel and tourism industry.
7(c): Describe one internal source of funding SNO Tours could consider when expanding into a global market. (2 marks)
Command term focus: Describe
Describe: give the main features of retained profits and apply them to SNO Tours’ Japan expansion.
See the full command term guide here: Command Terms.
7(c) Sample answer
One internal source of funding SNO Tours could use is retained profits. The case states that SNO Tours recorded a profit for the year, resulting in retained profits, meaning it has some money generated from within the business that could be reinvested into expansion.
SNO Tours could use these retained profits to help fund its Japan tour expansion, such as market research, website updates, marketing, deposits or planning costs. This would be useful because SNO Tours would not need to pay interest or give up ownership, although retained profits may not be enough to fund the whole expansion.