Internal financing is a form of capital provision or corporate financing without the use of external funds.
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Definition / explanation
Internal financing, also known as retained earnings, is the alternative to external or external financing. This financing method draws on funds that are already available in the company. Investments are made without any outside capital. Internal financing is divided into asset reallocation and asset growth.
Für diese Finanzierungsmethode werden die im betrieblichen Kreislauf vorhandenen Gewinne (Eigen-, Self-financing) und Rückstellungen (Fremdfinanzierung) eines Unternehmens verwendet. Voraussetzung einer Innenfinanzierung in einem Unternehmen sind ausreichend erwirtschaftete finanzielle Mittel.
Self-financing takes place in open or silent form. In the case of open self-financing, undistributed profits that are available to the company are used. In the case of silent self-financing, hidden reserves such as omitted write-ups, overvalued liabilities, undervalued assets or non-capitalized assets are used.
The silent form is not taxed because of the lack of reported profits. With self-financing there are no additional costs, such as interest or repayment obligations. Reinvesting profits in investment projects is hardly profitable.
Forms of internal financing
Internal financing through depreciation - Depreciation is an expense. A reallocation of assets or an asset swap becomes visible. Fixed assets are reallocated into cash. These funds do not appear as retained earnings and are available for additional investments.
Internal financing from provisions – Die Rückstellung ist ein periodenübergreifender Aufwand und führt erst später zu einer Verpflichtung. Der planmäßige Aufwand (z.B. Pensionsverpflichtungen) oder außerplanmäßige Aufwand (z.B. Rücklagen für Prozesskosten) bleibt bis zur endgültigen Inanspruchnahme im Unternehmen und kann für die financing von Investitionen verwendet werden.
Capital release - This involves an acceleration of the internal turnover of capital, a sale of the assets not required by a company or a reduction in the capital required for the company. These funds are used for internal financing.
Self-financing - silent or open self-financing
advantages and disadvantages
Advantages of internal financing:
- little effort to carry out the internal financing
- Independence from external investors (e.g. banks or shareholders)
- no costs incurred such as fees or commissions
- Financing tailored to the company
Disadvantages of internal financing:
- Planning and control are only possible to a limited extent
- Internal financing dependent on company and commercial law regulations
- Corporate financing without the addition of outside capital
- Financing method from own resources
- Division into asset growth and asset reallocation
- Forms of internal financing are self-financing, depreciation financing, reserve financing and capital release