What is meant by self-financing ?

Last modified:

Monday 24 February 2020

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.

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