Ploughing back of Profits – Advantages and Disadvantages

Ploughing back of Profits – Advantages and Disadvantages
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.

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.
The need for ploughing back of profits arises for the
following reasons:
Replacement of old machinery
Modernization of machinery and equipment
Expansion and growth of machinery

Meeting long and medium terms needs of business
 of loans and debentures
The main advantages of
ploughing back of profits to a company, shareholders and society are as under:
: 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.
2) Aids in Smooth Running: This self-financing method aids in the smooth running
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.
4) Self Dependent خود
Company: 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
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.
(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.
2) Increase in Earning
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.
(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.
2) Rapid
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
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.

The followings are
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.
2) Reduced Dividend: The reinvestment of profits reduces the amount of
dividend payable to shareholders.
3) Evasion بچت of
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
If there is too much
ploughing back of profits into business, it creates dissatisfaction and
frustration among shareholders.

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