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Internal Sources of Business Capital - Operating Income and Sale of Assets


Question: Internal Sources of Business Capital - Operating Income and Sale of Assets

Debt and equity financing are the main sources of traditional capital, or money, for business firms. They are external sources of money for the firm. They come from banks, bond issues, and equity investors. There are two other traditional sources of money or capital that companies have access to that are internal sources of money coming from firm operations:

Operating Income: A better source of capital for a company than debt or equity is a positive operating income from quarter to quarter. Why? Because the company is generating that positive operating income from its own successful business operations. Operating income is also known as earnings before interest and taxes or EBIT. Operating income or EBIT is used to determine how successful the firm's business actually is.

Positive operating income will generate cash reserves for the firm and eliminate the need for debt or equity financing which is the best of all scenarios for a business firm.

Sale of Assets: The sale of a firm's assets is most profitable for a mature firm. A mature firm can sell older and unneeded assets. If the assets have been fully depreciated and have little or no book value, then you will have a gain from the sale. Even though it is not a profit in the true sense of the word, it will add to your bottom line.

When you think about sources of money or capital for your business, think about both internal and external sources of capital along with alternative or non-traditional sources of business financing.

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