Self-financing is a form of Internal financing. It is made from retained profits that are generated through sales. In order to be able to operate self-financing, the retained profits must be calculated in the sales prices of the products, the sales prices must actually be realized and the sale of the products must lead to corresponding payments.
Reserves for self-financing
If this is the case, they can be used to build up reserves and in this way increase the amount of equity. The reserves may or may not be disclosed openly hidden reserves that are not immediately recognizable to the outsider. Accordingly, a distinction is made as self-financing:
- Open self-financing
- Silent self-financing
Self-financing: advantages and disadvantages
advantages lie in the cost-effective procurement and use of financial resources. In addition, no collateral has to be provided and no repayment obligations have to be met. The company's creditworthiness increases.
disadvantage Self-financing can be bad investments due to a lack of external control, manipulation of profits and concealment of profitability.
In the case of stock corporations, the retention or distribution of profits often creates potential for conflict between the management board and supervisory board or shareholders.