Internal financing
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INTERNAL FINANCING
Presented by:- RAVI GARG MBA 1ST
M1212
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MEANINGA 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.
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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 their utilisation 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 of
company .
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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 productivity Decrease 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 investor Misuse of the retained earning Manipulation in value of shares Evasion of tax Dissatisfaction 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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