What is meant by self-financing ?
Self-financing is one of the main sources of funding for a company, together with capital and credits. Self-financing occurs if the activity is profitable and if a decision is made not to distribute the profits.
In accounting terms, self-financing corresponds to the net profit after tax, not distributed, which is found in the liabilities on the balance sheet in terms of reserves and results recorded.
Self-financing is a particularly strategic source of financing for a company, as it allows said company to:
- increase its equity and thus its value
- possibly increase its capital by integrating accumulated amounts
- improve most of its financial ratios
- provide the resources that it may freely allocate
- finance its growth, its investments or repay debts, without having recourse to external funds
- reduce its dependence on financial backers
- provide a source of its own funds to obtain credit
- promote the profitability of the business model
- improve its credibility in the eyes of third parties and partners
The concept of self-financing is also often discussed in the broadest sense, namely a company's capacity to self-finance using its own capital and its profitability. This interpretation then includes all or part of the financing by capital.