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INTERNAL

FINANCING

Presented by:-

RAVIGARG

MBA 1ST

M1212

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MEANING

A new company can raise funds onlythrough external sources such as share ,

debenture , loans etc.

But an existing or a going concernwhich 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.

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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 theirutilisation in business known as self financing

or inter financing .

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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 ofcompany .

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FACTORS AFFECTING

Earning capacity

Desire and type of shareholder

Dividend policy Taxation policy

Future financial requirement

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MERITS

Economic method

Help to redeem liabilities

Increase productivityDecrease the risk of failure

Safety of investment

Make company self dependent Flexible financial structure

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LIMITATIONS

Over capitalisation

Creation on monopolies

Depriving the freedom of the investorMisuse of the retained earning

Manipulation in value of shares

Evasion of taxDissatisfaction among the shareholder

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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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