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Internal Financing

An existing company can generate internal financing through retained earnings and profits. This involves ploughing back profits each year rather than distributing all profits to shareholders. Ploughing back profits allows companies to self-finance replacement of old assets, expansion, growth, repayment of loans and debentures, and working capital needs. Factors that affect ploughing back profits include earnings capacity, shareholder desires and dividend policy, taxation policy, and future financial requirements. The benefits are that it is an economic method that helps reduce liabilities, increases productivity, decreases failure risk, and makes the company more self-reliant with a flexible structure. However, limitations include potential over-capitalization, creation of monopolies, depriving investor freedom

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242 views

Internal Financing

An existing company can generate internal financing through retained earnings and profits. This involves ploughing back profits each year rather than distributing all profits to shareholders. Ploughing back profits allows companies to self-finance replacement of old assets, expansion, growth, repayment of loans and debentures, and working capital needs. Factors that affect ploughing back profits include earnings capacity, shareholder desires and dividend policy, taxation policy, and future financial requirements. The benefits are that it is an economic method that helps reduce liabilities, increases productivity, decreases failure risk, and makes the company more self-reliant with a flexible structure. However, limitations include potential over-capitalization, creation of monopolies, depriving investor freedom

Uploaded by

Ravi Garg
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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INTERNAL FINANCING

Presented by:RAVI GARG MBA 1ST M1212

MEANING
A new company can raise funds only through external sources such as share , debenture , loans etc. But an existing or a going concern which needs finance for its future growth and expansion can also generate through its internal sources . Such as retained earnings or ploughing back of profits , capitalisation of profits and depreciation.

PLOUGHING BACK OF PROFITS

In this all the profits of the year are not distributed among the shareholders . Total profit retained in the firm . The process of retaining profits year after year and their utilisation in business known as self financing or inter financing .

NEED OF PLOUGHING BACK OF PROFITS


For replacement of old asset which have been obsolete . For expansion and growth . For making company self dependent . For redemption of loan and debenture . For satisfy the working capital needs of company .

FACTORS AFFECTING
Earning capacity Desire and type of shareholder Dividend policy Taxation policy Future financial requirement

MERITS
Economic method Help to redeem liabilities Increase productivity Decrease the risk of failure Safety of investment Make company self dependent Flexible financial structure

LIMITATIONS
Over capitalisation Creation on monopolies Depriving the freedom of the investor Misuse of the retained earning Manipulation in value of shares Evasion of tax Dissatisfaction among the shareholder

DEPRECIATION AS A SOURCE OF FINANCE


It means the gradual decrease in the value of asset due to wear and tear and passage of time . In reality depreciation is simply a book entry having the effect of reducing the book value of the asset and profits of same year for the same amount .

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