IMPORTANCE ON PLOUGHING BACK OF PROFIT RETAINED EARNINGS.

(MAR 2009) Meaning: - Ploughing back of profits is also called as retained earnings. It is an important source of f i n a n c i n g wo r k i n g c a p i t a l needs as well as fixed capital needs of an organisation. Instead o f disturbing all the profits to the shareholders by way of dividends, the firm retains a part of the profitfor self-financing.Companies normally retain a certain percentage of profit after tax for self financing. The percentageof retained earnings varies from company to company and from period to period. Importance of Ploughing back/Retained of profits: 1. No Dilution of Control : -Retained earnings do not dilute the control over the working of t h e f i r m. Th e c o n t r o l r e ma i n s wi t h t h e e x i s t i n g s h a r e h o l d e r s . H o w e v e r , r i s i n g o f mo r e equity capital from the market dilutes owners control. 2.Improvement of overall performance : - T h e R e t a i n e d e a r n i n g s c a n b e u t i l i z e d f o r expansion and modernization, which in turn can improve the overall performance of theorganisation. 3.No Interest Burden : -There is no cost of financing the Retained earnings. However, thereis interest burden if the funds are obtained through fixed deposits and debentures. 4.Flexibility for Utilising Funds : - Th e r e i s l o t of f l e x i b i l i t y f o r ut i l i z i n g t h e f u n d s . T h e management can utilize the funds either for working capital or fixed capital. 5.Investors Confidence : - Retained Earnings indicate a healthy practice on the practice of the company. Therefore, investors develop confidence in such companies. 6.Increase Net Worth : - R e t a i n e d Ea r n i n g s i n c r e a s e n e t wo r t h o f a c o mp a n y. Ne t w o r t h means equity capital + Free Reserves. The higher the net wort h, the greater is the creditworthiness of the company.

7.Buy-back of shares : - The Retained Earnings (Free Reserves) can be used for buy back of shares. The buy back is allowed under Indian Companies Act, in order to reduce the chanceof hostile take-over. 8.Reputation : - R e t a i n e d Ea r n i n g s i mp r o v e s i ma g e o f t h e c o mp a n y. I t i mp r o v e s c r e d i t worthiness of a company. Due to retained earnings, a company can easily obtain additionalfunds for expansion and modernisation