Strategic Asset Liquidation: Internal Financing Explained
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Chapter 1: Understanding Internal Financing
Internal financing refers to funds that originate from within a business itself. One of the primary methods of internal financing is the sale of fixed assets.
Section 1.1: The Concept of Fixed Asset Sales
A fixed asset sale occurs when a business divests itself of certain properties, transferring ownership to another individual, organization, or governmental entity. When should a business consider selling fixed assets?
In mature companies, managers may identify assets that are underutilized or no longer needed. These assets can be sold to generate cash for new initiatives that promote growth. For instance, a business might sell obsolete computers that have been replaced by newer models or outdated machinery.
If a company is planning to relocate, divesting from its existing land and buildings may be a prudent decision. This approach can provide significant funds necessary for establishing operations at a new site.
Section 1.2: Advantages of Selling Fixed Assets
- No Direct Costs: One of the primary advantages of this financing source is that it incurs no direct costs, such as interest payments.
- Substantial Capital Generation: Selling fixed assets can yield considerable sums. Even properties that are no longer needed often retain significant commercial value.
- Potential for Profit: Certain assets, especially land, tend to appreciate over time. If the selling price exceeds the initial investment, the owner stands to gain a profit.
- Debt Reduction: Proceeds from asset sales can be applied to reduce business debts, thereby lowering interest expenses and enhancing profitability. In critical situations, selling fixed assets can be a lifeline to avoid bankruptcy.
Chapter 2: The Challenges of Asset Sales
The first video titled "Selling Fixed Assets - Sources of Finance" provides insights into the dynamics of asset sales as a financial strategy.
Despite the benefits, selling assets does have its drawbacks:
- Finding Buyers Can Be Challenging: It may take time to locate buyers for unwanted assets, and sometimes businesses might not possess any surplus assets to sell.
- Obsolete Assets Might Lack Value: Older non-current assets, such as antiquated machinery or damaged furniture, may only have scrap value, limiting the financial return from their sale.
- Tax Implications: The sale of tangible assets often involves tax liabilities for both sellers and buyers, including transfer taxes and capital gains taxes. These costs can reduce the net proceeds for sellers while increasing the overall expense for buyers.
In extreme circumstances, companies may have no choice but to liquidate fixed assets to address urgent liquidity issues. The funds raised in such cases can support the business's operations for the foreseeable future.
The second video, "Sources of Finance | Sale of Assets | A-Level, IB & BTEC Business," elaborates on various financial strategies, including asset liquidation.