In this article you will learn the difference between internal and external financing.
The financing mode can be used to determine whether the cost item is to be financed from internal or external funds. The "Financing Mode" option is available in the "Opex", "Capex", "Reserve Account" and "Transaction Expenditures" sections.
Internal: to be financed from operational cash flows (standard for Opex items and reserve accounts) --> This option should be selected if the revenues are sufficient to cover the expenses.
- External: To be covered by debt, equity or shareholder loans (standard for Capex items and transaction expenditures) --> This option should be selected if the revenues are insufficient to cover the expenses. In this article we will show you the difference based on a Opex item. To illustrate the difference, we have created a simple project that contains only sales and one Opex item. The sales are 120'000 EUR per year and the Opex 60'000 EUR per year.
If you are editing an Opex item, you can choose between "internal" or "external" in the input field "Financing Mode".
Case 1: The Opex item is payed over the project lifetime and can be financed internally.
a. In the graph "Internal CF Waterfall" of the "Overview" section (this graph shows all internal cash flows), the sales are represented by the black line and the expenses as bars directly below the sales. 60.000 EUR of the 120.000 EUR sales are needed for the Opex payment. The remaining 60'000 EUR can be distributed as a dividend. Thus the sales are sufficient to cover the Opex.
Graph: "Internal CF Waterfall" in the "Overview" section.
Case2: The Opex item is payed as one-off prepayment and has to be financed externally.
a. The one-off prepayment is 1'500'000 EUR (lifetime of 25 years x 60'000 EUR p.a.)
Graph: Cashflow from the "Opex" section
b. Since the Opex are financed "external", there is an equity requirement of € 1,500,000 at transaction. This equity is used to cover the one-off payment of the Opex item. This can be seen in the "Overview" section at the graph "Uses & Sources". This graph shows all external cash flows.
c. At the "Internal CF Waterfall" graph, the entire income is now available as a dividend because the Opex were covered by equity.