Self financing basically refers to the act of making use out of an individual’s own capital which can serve the purpose of providing essential funds for a particular project or company.
Self financing provides the creator of a particular company or project to effectively maintain complete control except for any kind of influence arriving from outside. Such self financing projects are such that they also allow an industry to undergo a particular growth rate without the burden of any kind of debt.
|Benefits of Self Financing||Drawbacks of Self Financing|
|Serves as a cushion for absorbing the business shocks||Leads to a wide range of monopolies|
|Ensures to ease out the process of financing||Cause manipulation in the shares value|
|Benefits in stabilizing the specific dividend policy||Leads to evasion of tax|
|Ensures safety of investment for the shareholders||Can cause misuse of savings|
|Creates profit out of retaining the various shares||Chances of over-capitalization|
Advantages of Self Financing:
• Serves as a cushion for absorbing the shocks of the business organizations:
The self financing is known for benefiting a large number of companies by helping them to deal with accordingly as well aseasily overcome during the periodic depressions. It has been proven in various situations wherein for meeting the regular expenses of a company during a period of depression, the company often resorts to making use out of the retained profits.
This can ultimately help the company to withstand any kind of seasonal changes as well as major fluctuations in business. It is during such cases that the self financing schemes serve as a cushion for absorbing all kinds of shocks that might arise in the business cycle.
• Ensures to ease out the process of financing and it’s various schemes of rationalization:
Self financing has proven itself as an effective measure for ploughing back a wide range of profits which can ultimately enable the schemes that might be required for expanding the company or the business policies.
When such development and expansion take place in the business areas, it is the retained earnings which serves the most useful role for supporting the profitable kind of utilization for the company.
• Benefits in stabilizing the specific dividend policy:
It is with the help of self financing that a company can successfully aim towards stabilizing their dividend policies.
During such situations wherein any company is seen to earn a higher amount of profits as compared to the usual times, then such enterprises can attain a dividend rate of 6 percent instead of 5 percent. The retained profits serve the purpose in such scenarios for providing effective dividend equalization.
• Ensures safety of investment for the shareholders:
The self financing schemes ensures that the safety of the investments which are made by investors can be retained all throughout the process. Apart from that, the returns which are made on such investments can remain particularly constant with the help of the self financing schemes.
• Creates profit out of retaining the various shares:
During such situations where the shares can be retained, the shareholders can earn the enhanced capacity which can definitely serve to benefit the company in the most effective manner. Therefore, the self financing schemes can help such companies to earn profit by retaining the wide range of shares.
Disadvantages of Self Financing:
• Leads to a wide range of monopolies:
Self financing schemes have often led to such situations wherein the inter investment measures may undergo an expansion to such an extent where it may become unmanageable to control all the wide range of affairs. Therefore, during such scenarios, ploughing back may often lead to the evolution of various monopolies which goes on to reflect all kinds of inherent evils.
• Cause manipulation in the shares value:
During the significant inflation of the retained profits, the management services might target towards manipulating the wide range of security values with the help of the required payments that are done for such dividend rates.
This can ultimately create a negative impact upon the strategizing policies of the company which can lower the market values of the shares, wherein they are often subjected to such intentions where they are considered to be purchased at a lower price.
• Leads to evasion of tax:
Self financing has often subjected a company to many such situations where they had to undergo huge amount of losses for the evasion of tax. When the inflation of the retainable profits take place, it might quite often lead to tempting the management to undergo the manipulation caused by the security oriented values with the appropriate amount of payment done with the help of dividend rates.
By declaring lower dividend rates, the market price of the various shares can ultimately be reduced to a great amount.
• Can cause misuse of savings:
There are many a times where the corporate savings are not effectively used for the most useful purpose. Instead, such retained profits may often undergo many such situations wherein they are misused to a great extent by management which ultimately fails to retain their profit margins.
• Chances of over-capitalization:
The retained profits are often seen to result in many such drastic situations where it leads to over-capitalization of a particular company due to the reason that the management might often be more inclined towards capitalizing the reserves with the help of the bonus shares.
Self financing has definitely attained a good amount of fame during the present times of the ongoing 21st century. It has served it’s purpose of benefiting a number of organisations to overcome various problematic situations by helping them to make use of the retainable profits that were earned by the company all throughout the years.
However, the usage of such retained earnings have often led to creating a negative impact upon the company and its functioning policies by leading to misuses as well as formation of large number of monopolies.