Self-financing - what is it? What is the essence of this process? How is it implemented? What acts as the basis for its implementation? What useful role does self-financing play in the development of an enterprise? How important is it for its stable operation?
Self-financing is the provision at the full disposal of appropriate funds that allow you to provide work, develop production and infrastructure, perform some work on the introduction of innovations, carry out technical re-equipment, increase wages to employees in proportion to their labor contribution. What does it give?
Self-financing of the enterprise significantly increases the role of depreciation as a source of reproduction. Under such conditions, its share among capital investments is also growing . But nevertheless, its final size largely depends on the structure of production, growth rates, fixed assets, their value and depreciation rates. Self-sufficiency, and with it self-financing of enterprises are the 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 are obliged to ensure their production, scientific, technical and social development. In addition, this allows the state budget to conduct a qualitative concentration of funds with the subsequent application of relatively socially important areas - support for the population, assistance in the structural adjustment of the economy, development of scientific and technical potential.
The necessary conditions for self-financing of an enterprise is an orientation toward the creation and sale of products in which consumers are interested, and which can compete with competitors' goods or services. Additionally, you still need to be able to flexibly adapt to an ever-changing market environment.
What happens in normal mode?
When there is self-financing of the enterprise and full economic calculation, the economic entity independently makes decisions on a very wide range of issues, including planning, stimulation, financing, technical and social development of production, and many others.
Since they are 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 all potential. Self-financing is an integral part of independence.
What and how in reality?
Let's look at a small example with a bank. 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 bias, or someone from the top management cheated, and the money began to be sorely lacking. In other words, the principle of self-financing of an enterprise is not fulfilled.
In this case, in order to prevent losses from ordinary investors, the state introduces a temporary administration. She goes over management functions to herself and is engaged in eliminating or at least minimizing negative consequences. And the bank itself no longer belongs to itself (the owners), since it cannot fulfill the necessary set of functions.
What is necessary for successful activity?
Earlier it was 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 this is all based on a foundation whose name is equity. It is the foundation for starting and “inspiring life” in an enterprise.
But still, financing activities exclusively from equity does not justify itself. This is especially true for those firms in which production is seasonal. At the same time, equity is necessary, because it is the basis of independence and autonomy. True, you should always consider that it is invested on a long-term basis. However, he is also at greatest risk.
At the same time, equity is one of the most important parameters for lenders and investors. So, it is believed that the larger its share in the total amount (and relative to borrowed funds), the better the characteristics. Indeed, the presence of a significant (in percentage and quantitative terms) equity capital protects lenders and investors from potential losses and, therefore, reduces the risk of losing everything.
Of course, a lot depends on the enterprise, but not all. To determine the situation using the coefficient of self-financing. In addition to the enterprise itself, tax policy also affects it. It can lead to a shortage of working capital and increased investment risks.
If you want to improve the performance of the subject of economic activity, it is necessary to take advantage of what the analysis tools offer. It allows calculating self-financing coefficient on the basis of statistical and accounting information in order to digitally present the current state of affairs at the enterprise, as well as assess 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.