Company Self-Financing: Internal Capital Strategies

Understanding Self-Financing in Business

Self-financing refers to funds a company generates internally, without relying on external financial institutions or new contributions from its members. This form of financing generates resources within the firm, encompassing both retained earnings and reserves, as well as depreciation and provisions for risks.

Enrichment Self-Financing for Growth

Enrichment Self-financing (for company growth) refers to the portion of profits that partners forgo sharing. This portion then becomes part of the company's own funds to supplement capital, often termed 'reserves'. The fewer dividends distributed, the more internal resources are retained, increasing the company's self-financing capacity. However, dividends can also signal positively to potential investors and enhance future funding opportunities.

Types of Reserves

Reserves can be classified as:

• Legal Reserves

  Mandated by corporate law, typically requiring a minimum of 10% of profits to be allocated until the reserve reaches 20% of share capital.

• Statutory Reserves

  Established based on agreements outlined in the company's articles of association.

• Voluntary Reserves

  Formed by the voluntary agreement of the partners.

These reserves represent an increase in the company's equity, providing new resources to finance investments for growth and expansion, thereby constituting a source of cash flow for the company's enrichment.

Maintenance Self-Financing for Capacity

Maintenance Self-financing (aims to preserve productive capacity) comprises funds the company allocates to maintain its production equipment and amortize assets for future renewal, as well as reserve funds to meet future contingencies or risks.

Depreciation and Amortization

Productive assets lose value over time. This loss in value (depreciation) is reflected in the calculation of profits under the concept of amortization. Depreciation is an effective measure if it accurately reflects the cost portion consumed from the total value of assets over a specific period. Depreciation charges are production costs, and the loss of value experienced by the company's assets stems from their use in the production process.

Depreciation funds are a form of self-financing designed to gradually recover the cost of depreciable assets to facilitate their restoration or replacement when needed. Until the time comes to replace the equipment, the company can utilize these funds to finance its own investments.

Provisions for Future Risks

Provisions are funds set aside to cover risks or possible future losses, with their maximum allocation performed before the calculation of profits. While these funds are reserved for their intended purposes, the company may temporarily use them to self-finance investments.