Benefits Or Advantages Of Secret Reserve
The main advantages of creating secret reserve can be pointed out as follows:
1. Covers Future Loss And Contingencies
Creation of secret reserve helps the organization to cover future contingencies, liabilities and unknown losses.
2. Provides Financial Stability
Secret reserve helps to maintain good financial health of business because it provides financial stability by covering unexpected losses and liabilities.
3. Internal Financing
It may be used as the source of internal financing to retain assets and other properties.
6. Equalization Of Dividend
4. Additional Working Capital
Secret reserve helps to improve operational efficiency of the firm by eliminating the inadequacy of working capital by providing additional funds.
5. Image And Goodwill
It helps to maintain image and goodwill of the business and wins the public confidence.
It helps to equalize the rate of dividend which gives positive message to the shareholders.
Drawbacks Or Disadvantages Of Secret Reserve
Some of the major disadvantages of secret reserve can be pointed out as follows:
1. False And Inaccuracy
It ignores accounting norms and standard by providing false and inaccurate financial data.
2. Misuse Of Fund
There is a high chance of fraud and misuse of secret reserve by the top level management.
3. Less Profit
Creation of secret reserve decreases the amount of actual profit of the firm. So, shareholders may be disappointed.
4. Borrowing Problem
Secret profit lowers the net profit of the firm. Due to poor profit condition, banks and other financial institutions hesitate to provide loan.
5. Decrease In Share Value
Share value decreases because of secret reserve which is not good for the shareholders and business.
