Riaz Academy
Ploughing back of Profits – Advantages and Disadvantages
Q. What is meant
by “Ploughing back of Profits”? Discuss the advantages and disadvantages of the
policy of Ploughing back of profit.
by “Ploughing back of Profits”? Discuss the advantages and disadvantages of the
policy of Ploughing back of profit.
Answer: Ploughing back of profit
means the use of profits of the business for its development. Ploughing back of
profits is a useful source of getting extra capital for building and expansion
of business. As stable مستحکم company
invests a certain percentage of profits into business. This process of
retaining profits into business is called ploughing back of profits.
means the use of profits of the business for its development. Ploughing back of
profits is a useful source of getting extra capital for building and expansion
of business. As stable مستحکم company
invests a certain percentage of profits into business. This process of
retaining profits into business is called ploughing back of profits.
NEED OF
PLOUGHING BACK: The need for ploughing back of profits arises for the
following reasons:
PLOUGHING BACK: The need for ploughing back of profits arises for the
following reasons:
a)
Replacement of old machinery
Replacement of old machinery
b)
Modernization of machinery and equipment
Modernization of machinery and equipment
c)
Expansion and growth of machinery
Expansion and growth of machinery
d)
Meeting long and medium terms needs of business
Meeting long and medium terms needs of business
e)
Redemption
واپسی of loans and debentures
Redemption
واپسی of loans and debentures
ADVANTAGES/MERITS OF PLOUGHING BACK OF
PROFITS
PROFITS
The main advantages of
ploughing back of profits to a company, shareholders and society are as under:
ploughing back of profits to a company, shareholders and society are as under:
(A) ADVANTAGES To A
COMPANY: Following are the
advantages for the company
COMPANY: Following are the
advantages for the company
1) Shock Absorber: In a period of depression مایوسی, the part of profits reinvested in
business act as shock absorber. The company can easily face the shocks of ups
and downs of business cycles.
business act as shock absorber. The company can easily face the shocks of ups
and downs of business cycles.
2) Aids in Smooth Running: This self-financing method aids in the smooth running
of the business.
of the business.
3) Increase Credit Worthiness
صلاحیت: A company which reinvests a part of profits every year into the
business is considered a stable company. As such it increases the credit
worthiness of the company.
صلاحیت: A company which reinvests a part of profits every year into the
business is considered a stable company. As such it increases the credit
worthiness of the company.
4) Self Dependent خود
مختارCompany: A company which retains a part of profits becomes self-dependent
to a great extent. It depends less on outsider agencies for financial help.
مختارCompany: A company which retains a part of profits becomes self-dependent
to a great extent. It depends less on outsider agencies for financial help.
5) Expansion and Growth: The company with retained earnings can spend funds
for expansion, modernization, replacement of machinery, etc. easily for
business.
for expansion, modernization, replacement of machinery, etc. easily for
business.
6) Redemption of Long Term
Debts: A company which re-employs a part of profits into business is generally
able to pay back its long term loans easily.
Debts: A company which re-employs a part of profits into business is generally
able to pay back its long term loans easily.
(B) ADVANTAGES To Shareholders: Following are the advantages for the shareholders.
1) Increase in the value
of Shares: A company which earns
profits and reinvests a part of it into business every year is considered a
stable company. It earns a good name. As such the value of its shares rises in
the share market.
of Shares: A company which earns
profits and reinvests a part of it into business every year is considered a
stable company. It earns a good name. As such the value of its shares rises in
the share market.
2) Increase in Earning
Capacity: The retained earnings in
the business helps the company to grow. It increases the earning capacity of
the concern.
Capacity: The retained earnings in
the business helps the company to grow. It increases the earning capacity of
the concern.
3) Retaining the Control: A self-financing company no need to issue new shares
for its future capital requirements. This enables the existing shareholders to
retain the control of the company.
for its future capital requirements. This enables the existing shareholders to
retain the control of the company.
(C) ADVANTAGES to Society: Following are the advantages for the society.
1) Increase in the Rate of
Capital Formation: The retained
earnings in a business lead to expansion and growth of business. The rate of
capital formation increases in the country.
Capital Formation: The retained
earnings in a business lead to expansion and growth of business. The rate of
capital formation increases in the country.
2) Rapid
Industrialization: The ploughing back
of profits into business stimulates ابھارناindustrialization in the country. The nation as a
whole, thus benefits from it.
Industrialization: The ploughing back
of profits into business stimulates ابھارناindustrialization in the country. The nation as a
whole, thus benefits from it.
3) Increase in Industrial
Capacity: The reinvestment of profits
in the business meets a part of the fixed and working needs of the company. The
modernization and rationalization increase industrial production.
Capacity: The reinvestment of profits
in the business meets a part of the fixed and working needs of the company. The
modernization and rationalization increase industrial production.
4) Better Quality of Goods
at Reduced Prices: The retained earnings
in business increases productivity, reduces costs, provided more jobs to the
workers, leads to increase in their wages, etc. The industries are able to
produce better quality of goods at cheaper cost.
at Reduced Prices: The retained earnings
in business increases productivity, reduces costs, provided more jobs to the
workers, leads to increase in their wages, etc. The industries are able to
produce better quality of goods at cheaper cost.
LIMITATIONS/DANGERS/DISADVANTAGES
The followings are
disadvantages of ploughing back of profits.
disadvantages of ploughing back of profits.
1) Overcapitalization: If there is excessive ploughing back of profits, it
may lead to overcapitalization of the company. The company may not be able to
pay a fair rate of dividend to its shareholders.
may lead to overcapitalization of the company. The company may not be able to
pay a fair rate of dividend to its shareholders.
2) Reduced Dividend: The reinvestment of profits reduces the amount of
dividend payable to shareholders.
dividend payable to shareholders.
3) Evasion بچت of
Taxes: A company may retain earnings
with the sole object of evasion of super profit tax. Such evasion of taxes
reduces the revenue of the government.
Taxes: A company may retain earnings
with the sole object of evasion of super profit tax. Such evasion of taxes
reduces the revenue of the government.
4) Frustration مایوسی among
Shareholders: If there is too much
ploughing back of profits into business, it creates dissatisfaction and
frustration among shareholders.
Shareholders: If there is too much
ploughing back of profits into business, it creates dissatisfaction and
frustration among shareholders.