Professional Documents
Culture Documents
1.3 Internal Funding Sources
1.3 Internal Funding Sources
The most of this approach – it saves money on interest payments and free
companies from bankruptcy.
The least of this approach - it can limit expansion options, if there is not
enough cash available to proceed with the strategical plans
Retained earnings
Depreciation (amortization)*
Advantages:
- Less costly.
- Tax advantages (Depreciation).
- Higher solvency and financial autonomy.
Disadvantages:
- Lower profitability (Depreciation)
- Lower ROE
- Risk of idle resources and high risk investment
Net income
ROE
Equity
Reserves:
All retained earnings are Reserves, but not all Reserves are
retained earnings.
Examples:
- Balance sheet update - generated Reserves
- Issue premium - Reserves
- Secret Reserves (accounting practices)
- Hidden Reserves (market value)
INCOME STATEMENT
SALES
- COST OF GOODS SOLD
GROSS PROFIT
- OPERATIONAL COSTS
EARNINGS BEFORE INTEREST DEPRECIATION AND AMORTIZATION = EBITDA
- DEPRECIATION AND AMORTIZATION
EARNINGS BEFORE INTEREST AND TAXES = EBIT
- INTERESTS
EARNINGS BEFORE TAXES = EBT
- TAXES
NET INCOME = NI
ALLOCTION OF NET INCOME
DIVIDENDS
RETAINED EARNINGS (RE)
70.000 = 200.000 – 130.000 higher cash-outflow due to higher payment in taxes and dividends
Galeeva,G,, Sebastián, A., Solé, E. de Andrés, F. FINANCIAL MANAGEMENT 13
Internal Financial Sources
Kinds of Depreciation:
- Functional (use).
- Physical (time).
- Economic (obsolescense).
- Technological.
- Changes in Product Demand.
- Changes in Remuneration of Factors
- Depletion.
So, because of the depreciation expense, our company it’s been able to
retain some cash; enough cash to replace the truck at the end of its useful
life.
• Secret reserve is also known as internal reserve. It is created by showing the figure of net
profit less than actual. Its existence makes the financial position of the business better than
what the balance sheet is disclosing.
Debt = D
Equity = E
40%
40%
Equity = E
Debt = D
60%
60%
Net profit / S. Equity = Net profit / Total Assets x Total Assets / S. Equity
Net profit / Total Assets = Net profit / Net revenues x Net revenues /
Total Assets
D/E = Total Liabilities / S. Equity (Capital Structure and leverage of the company)
D/E = Leverage - 1