Usually, a company does not distribute its entire profits as dividend to shareholders, rather a part of the profit is retained to be used for future growth prospects and for other future uses. This is also known as ploughing back of profits, retained earnings, self – financing or internal financing, etc. It is considered as a cushion of security because it provides support in times of adversities. Retained earnings add to the financial strength and improve the credibility of the company. This is the most dependable, cost-free, internal source of finance.
