Home » Eng Accounting » S » Self-financing

Self-financing

Capital generated from income. A firm which is self-financing is generating its investment funds from internal sources, i.e. ploughing back of retained profits (or retentions), and depreciations, as opposed to external borrowing. A quoted company has the choice of financing fixed capital formation or increasing its stocks and work in progress or acquiring other companies or shares in them, either by borrowing on the stock exchange (or from other sources, including banks) or by using undistributed income. If it borrows, it will have to pay interest or dividends and issuing costs on new issues. If it uses undistributed income, it is choosing to pay its ordinary shareholders a lower dividend, i.e. to distribute less of its income.

Unquoted companies do not have the alternative of new issues of shares, although they may take further equity from private sources and borrow from other sources. In fact, the bulk of capital expenditure is financed from internal sources.

Reference: The Penguin Dictionary of Economics, 3rd edt.