Ploughing back of profits’ is an important source of internal or self financing by a company. It refers to the process of retaining a part of the company’s net profits for the purpose of reinvesting in the business itself. In other words, the savings generated internally by a company in the form of ‘retained earnings’ are ploughed back into the company for diversification of its business. This reduces their dependence on funds from external sources in order to finance their regular business needs. Such a source of finance may be used by the company for the following purposes:-
- For expansion and growth of the business
- For strengthening the financial position of the company
- For meeting various working capital requirements of the company
- For redemption of old debts
- For replacement of obsolete assets and modernisation.
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