Self-financing - what is it?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Self-financing - what is it? What is the essence of this process? How is it implemented? What is the basis for its implementation? What useful role does self-financing play in the development of an enterprise? How important is it to its stable operation?

General information

Self-financing is the provision of appropriate funds at full disposal, which allow you to provide work, develop production and infrastructure, perform certain work on the introduction of innovations, carry out technical re-equipment, increase wages for employees in proportion to their labor contribution. What does it give?

Self-financing of the enterprise's activities significantly increases the role of depreciation as a source of reproduction. In such conditions, its share among capital investments is also growing. But still, its final size largely depends on the structure of production, growth rates, fixed assets, their cost and depreciation rates. Self-sufficiency, and with it the self-financing of enterprises arethe most important principles for the existence of modern firms and organizations.

Requirements of modern conditions

Now, with self-financing for successful activities in the future, enterprises must ensure their production, scientific, technical and social development. In addition, this allows the state budget to carry out a qualitative concentration of funds with the subsequent use of relatively socially important areas - support for the population, assistance in the restructuring of the economy, development of scientific and technical potential.

The necessary conditions for the self-financing of an enterprise are an orientation towards the creation and sale of products in which consumers are interested, and which can compete with the goods or services of competitors. In addition, you still need to be able to flexibly adapt to constantly changing market conditions.

What happens in normal mode?

When there is self-financing of the activity of an enterprise and full cost accounting, then the subject of the economy independently makes decisions on a very wide range of issues, including planning, stimulation, financing, technical and social development of production, and many others.

Because they are also responsible for the result of actions, they are most interested in making reasoned and competent decisions that are aimed at maximizing resource use and realizing the full potential. Self-financing isan integral part of independence.

What and how in reality?

Let's look at a small bank example. A financial institution appears, which begins to accept money from the population for deposits and issue them for loans. If self-financing works, that's good. But then there was a skew, or someone from the top management cheated, and the money became sorely lacking. In other words, the principle of self-financing of the enterprise is not fulfilled.

In this case, in order to prevent losses on the part of ordinary depositors, the state introduces a temporary administration. It sorts out managerial functions and deals with the elimination or at least minimization of negative consequences. And the bank itself no longer belongs to itself (the owners), since it cannot perform the necessary set of functions.

What do you need to be successful?

It has already been mentioned that in order to achieve profits, it is necessary to focus on customers and produce products that can compete with what is already on the market. But it's all based on a foundation whose name is equity. He is the foundation for starting and "inspiring life" in the enterprise.

But still, financing activities solely from equity does not justify itself. This is especially true for those firms whose production is seasonal. At the same time, it is necessary to have own capital, because it isbasis of independence and autonomy. True, it should always be considered that it is invested on a long-term basis. However, he is also at the highest risk.

At the same time, the amount of equity capital is one of the most important parameters for creditors and investors. So, it is believed that the larger its share in the total amount (and relative to borrowed funds), the better the performance. After all, the presence of a significant (in percentage and quantitative terms) own capital protects creditors and investors from potential losses and, therefore, reduces the risk of losing everything.

Conclusion

Of course, a lot depends on the enterprise, but not everything. To determine the state of affairs use the coefficient of self-financing. In addition to the enterprise itself, it is also affected by tax policy. It can lead to a shortage of working capital and increased investment risks.

If you want to improve the performance of an economic entity, you need to use what the analysis toolkit offers. It allows, on the basis of statistical and accounting information, to calculate the self-financing ratio in order to digitally represent the current state of affairs in the enterprise, as well as to assess the existing development trends. Already on the basis of these data, it will be possible to navigate what the development and promotion strategy should be based on.