Retaining earning and Undistributed profits

A company can also secure funds by retaining a portion of the returns available for shareholders. This method of acquiring funds is called retaining earning. The retained earnings are undistributed profits. The retention of earnings can be considered as a form of raising new capital. If a company distributes all earnings to shareholders, then, it can reacquire new capital from the same sources by issuing new shares.

The funds raised by a company will be invested in•the available investment opportunities. Each investment opportunity available to a company is called investment project or simply a project. A project involves use of funds presently in the expectation of future benefits. The company may also have on-going projects. They (on-going projects). may also involve outlays of cash to maintain or to increase their profitabilities. It would be realised that generation of revenue -a production activity-is possible only when funds are invested in projects.

There exists an inseparable relationship between the fmance function on the one hand and the production, marketing and other functions on the otet-h—'7CIlinost all kinds ofbL.smess activities directly or indirectly involve the acquisition and use of money. For example, recruitment and promotion of employees in production is clearly a responsibility of the production department; but recruitment and promotion of employees requires payment of wages and salaries and other benefits, and thus, involves finance.

Similarly, buying a new machine or replacing an old machine for the purpose of increasing productive capacity affects the flow of fluds. The sales promotion policies come within the purview of marketing, but advertising and other sales promotion activities require outlays of cash and, therefore, affect financial resources. Where, then, is the separation between production and marketing functions and the finance function of i..iaking money available to the costs of production and marketing operations? Where do the production of marketing functions end and the finance function begins? There are no clear-cut answers to these questions. The finance function of raising and using money although has a significant effect on other functions, yet it need not necessarily limit or constraint the general running of the business.

A company in tight financial position will, give more weight to financial considerations, and will devise its marketing and production strategies in the light of the financial constraint. On the other hand, management of a company, which has plentiful supply of funds, will be more flexible in formudting its production and marketing policies. In fact, the financial policies will be devised to fit the production and marketing decisions under such a situation.

LIQUIDITY vs PROFITABILITY | MAXIMISATION OF RETURN | WEALTH MAXIMISATION | Constraints - Policy Decisions - Profitability | IMPLICATIONS OF WEALTH MAXIMISATION | Suppliers of Loan Capital | RELEVANCE OF WEALTH MAXIMISATION | Retaining earning and Undistributed profits | Managerial finance function | Functions of Financial Management | FINANCIAL FORECASTING | MANAGEMENT OF CORPORATION ASSET STRUCTURE | THE MANAGEMENT OF INCOME | MANAGEMENT OF CASH | DECIDING OUT NEW SOURCES OF FINANCE | CONTACT AND CARRY NEGOTIATIONS FOR NEW FINANCING | ANALYSIS AND APPRAISAL OF FINANCIAL PERFORMANCE | INCIDENTAL OR ROUTINE FUNCTIONS | CAPITAL BUDGETING DECISION | CURRENT ASSET MANAGEMENT | Maximisation of Share Value | RESPONSIBILITIES OF FINANCIAL MANAGEMENT IN THE FIRM | Functions of the Treasurer and Controller | TASKS OF FINANCIAL MANAGEMENT | CHALLENGES OF FINANCIAL MANAGEMENT | Gross and Net Savings | Household Savings | How to politely win when credit disputes and problems arise