Company Financing and Resource Allocation

Company profits, derived mainly from social contributions and undistributed profits (specifically reserves), are allocated through the following steps:

1. Proposal: Administrators propose the application of results.
2. Resolution: The general meeting of shareholders approves the proposal.
3. Agreement: Administrators and the general meeting agree on interim dividend payments.

Profit allocation options include:

• Legal Reserves: Mandatory for corporations, set at 10% of annual profit up to 20% of share capital.
• Special Reserves: Allocated annually to guarantee compliance with legal, statutory, or other binding obligations (e.g., reserves for own shares).
• Dividends: Distributed to shareholders as determined by the general meeting and managers, after allocating legal and statutory reserves.
• Voluntary Reserves: Allocated at the discretion of the general meeting and managers.
• Management Remuneration: Payments to the board of directors for their work.

Self-financing is the ability to generate resources for investments and growth. It includes self-financing for maintenance and enrichment.

Maintenance Self-Financing: Focuses on maintaining the company’s productive capacity through amortization, provisions, and impairment. It arises from variations in company value, which can be positive (revaluation of assets) or negative.

Negative changes can be:

• Direct: Real decrease in fixed assets (depreciation).
• Indirect: Temporary reduction in value, requiring provisions (asset impairment or liability provisions).

Enrichment Self-Financing: Uses profits for investments that increase business activity, primarily through undistributed profits (reserves).

Advantages of Self-Financing

1. Strengthens financial structure.
2. Enables growth without debt.
3. Increases borrowing capacity.

Disadvantages of Self-Financing

1. May fund less profitable projects.
2. Can create the impression of debt aversion.
3. High profit retention can reduce shareholder returns.

Funding sources are classified by:

1. Ownership:
   • Self-Financing: Owned by shareholders (share capital, reserves, undistributed profits).
   • External Financing: Debt incurred by the company (credit, obligations, suppliers).
2. Duration:
   • Permanent Resources: Remain in the company for over a year (net worth, non-current liabilities).
   • Short-Term Resources: Mature within a year (current liabilities, suppliers).
3. Source:
   • Self-Financing: Generated internally (enrichment and maintenance).
   • External Financing: Obtained from outside the company (equity, debt).