Explain the following term / concept : Ploughing back of profit

Answer: Ploughing back of profit means retaining a part of the net profit in the business, instead of distributing it all as dividend, and reinvesting it for growth and expansion.

• It is also called retained earnings or self-financing; it is an internal source of owned capital.
• The retained profits are kept as reserves such as general reserve and are used for expansion, modernisation, replacement of assets and meeting working capital needs.
• It involves no cost of raising funds, no interest and no dilution of control.
• It is possible only for an established company earning regular profits, and it may reduce the dividend paid to shareholders.