Internal funds are a reference to the type of money that is generated from within a company as opposed to that generated from outside sources. In other words, this type of funding is entirely sourced from the company itself or from its activities pertaining to the realization of that aim. As such, internal funds may be generated by plowing the profit back into further investment, selling some of the company’s assets, or aggressively driving toward the realization of more capital.
An example of the application of the concept of internal funds can be seen in the situation where someone wants to start a company. Assuming the person has $100,000 US Dollars (USD) in the bank and the total cost for establishing the company is $95,000 USD, he or she could use the $95,000 USD to establish the company. In this case, the $95,000 USD serves as a source of internal funds, mainly due to the fact that the owner of the business relied on his or her own internally generated funds to start the company. If the owner did not have this money, he or she would have had to look for other sources of generating the startup funds for the business.
Another application of internal funds is a situation where an already established company is looking for funds with which to expand its production plant. If the company uses funds that it raised by itself without any help from outside investors or lenders, the company would have succeeded in generating internal funds. One of the methods by which the company can do this is by converting its profits into a source of capital. Where this is the case, the owners of the business would have to forfeit any form of share of the profit, which is one of the drawbacks in this type of method for raising internal funds.
The company could also engage in aggressive strategic marketing of its products or services in order to create more awareness, increase its customer base, and consequently increase its sales. If the company is successful in this endeavor, the money generated from the sales will be used as a source of internal funds. Also, companies with a lot of assets could decide to sell some in order to raise the money they need. This is not the best form of raising funds internally, but it is still a method of raising funds that does not require dependence on outside sources.