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Retained Earnings

In: Business and Management

Submitted By crsuresh
Words 424
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Retained earnings involves social waste
Profit diversion or channelization may be made in three broad categories by way of taxation, ploughing back of profits and dividend payments. When profits are achieved at a substantial rates, normal dividend payments and retention of insufficient funds in business do not naturally subject the management to any objection from shareholders to the procedure of ploughing back of profits. If the earnings are small and the rate of dividend be lowered, shareholders object to ploughing back of profits. Generally retained earnings are important for fixed capital as well as for working capital requirements which is necessary for expansion and development schemes. To improve efficiency of Fixed assets like plant and equipments and the unreliability of financial statements as such management is compelled to resort to self financing technique. It is not very unusual for companies if they overstate their profits on paper even if the earnings are less. There are a host of advantages but nothing in this world is an unmixed blessing; not to speak of self financing or ploughing back of profits. Excessive resort to this practice leads to ove investment as a consequence of which monopoly vices become evident and leads to a fraudulent manipulations.
Many think that excessive ploughing back entails social waste. A cost free source of finance having no dilution of earnings per share. No interest has to be paid nor there is any compulsory periodic payment in the form of dividend liability in case of retained earnings. Further it does not bring about any change of control as there is no increase in the equity capital. The use of retained earnings does not involve management in any restriction as is the case with share or debenture issue; as such managerial considerations and decisions can be made at the right time. Retained earnings is a permanent...

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