Retained Earnings: Defined and Explained
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What Are Retained Earnings?
How Do You Use Retained Earnings?
Used to Pay Back Business Loans
Mergers and Acquisitions
Other Types of Reinvestment
Launch a new product/variant Increase production capacity of the existing products Hire more staff Buy new equipment and machines Invest in research and development
Pros and Cons of Retained Earnings
Pros of Retained Earnings
They are an inexpensive source of funds, since (unlike loans), there are no interest payments or fees. There are no conditions on how you can spend the money. They can increase your future retained earnings if re-invested wisely. They can be used to repay high-interest loans, as well as short-term debt to reduce accounts payable.
Cons of Retained Earnings
The amount of retained earnings rises and falls depending on profit trends and dividend payouts. If shareholders believe you are not using the money effectively, they may feel cheated out of dividend income. Owners and managers may decide to spend the funds simply because the money is there and potentially waste it. High retained earnings could cause owners/managers to make risky investments.
Retained Earnings Formula Explained
Calculating Retained Earnings
Are Retained Earnings a Debit or Credit?
Retained Earnings vs Dividends vs Revenue
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