Learn: Retained Profit

Welcome!Today we'll learn about retained profit, a key source of finance for businesses. Let's explore what it is, why it is important, and how it helps businesses grow.

What is Retained Profit?Retained profit is the money a business keeps after paying all its costs, taxes, and dividends to shareholders. It is the profit that is reinvested back into the business instead of being distributed to owners or shareholders.

Why is Retained Profit Important?Retained profit is important because it allows businesses to grow without borrowing money. It can be used for things like buying new equipment, developing new products, or expanding into new markets. Since it doesn’t involve external lenders, it gives the business more independence.

Advantages of Retained ProfitOne major advantage of using retained profit is that businesses do not have to pay interest, unlike loans. This makes it a cost-effective way to finance growth. It also doesn’t require approval from external lenders, giving businesses more control over how the funds are used.

Disadvantages of Retained ProfitAlthough retained profit is useful, it has limitations. For example, it can only be used if the business has made a profit. If the business hasn’t been profitable, there will be no retained profit available. Additionally, reinvesting profit means less money for distributions to shareholders, which may upset them.

How is Retained Profit Calculated?Retained profit is calculated by subtracting costs, taxes, and dividends from total revenue. The formula is: Retained profit = Total revenue - (Total costs + Taxes + Dividends).

When Do Businesses Use Retained Profit?Businesses may use retained profit to fund growth strategies, such as developing new products, expanding into new markets, or purchasing new equipment. This is often preferred over borrowing money because it avoids interest payments and debt.

Review Time!Great work! You've learned about retained profit, its advantages, disadvantages, and how it is calculated. Let's test your understanding with a few final questions.

Well Done!You've successfully learned about retained profit and how businesses use it to grow. Keep practicing calculations and applying this concept to real-world examples to strengthen your understanding!