Let’s talk money – your company’s money! Specifically, retained earnings. Sounds boring? Don’t worry, we’ll make it simple, snappy, and maybe even fun. Retained earnings are a key piece of your business’s financial puzzle. They show how much profit your business has kept over time (instead of handing it out as dividends). So, how do you calculate them?
First things first… what are retained earnings?
They’re basically a piggy bank. It’s the money your company made, minus what you’ve shared with shareholders. It’s what’s left to reinvest or save for a rainy day. Retained earnings grow (or shrink) over time as your business makes more money and pays out dividends.
Here’s the formula:
Retained Earnings = Beginning Retained Earnings + Net Income – Dividends
Let’s break that down.
- Beginning Retained Earnings: How much you had saved up at the start.
- Net Income: Your profit after all expenses.
- Dividends: The money paid out to owners/shareholders.
Example time!
Let’s say your company started the year with $10,000 in retained earnings. You made a $5,000 profit (net income) and paid $2,000 in dividends.
Retained Earnings = $10,000 + $5,000 – $2,000 = $13,000
Easy, right?
Now, why do retained earnings matter?
- They show whether your business is growing over time.
- They help you decide how much money to reinvest.
- They tell investors how you manage profits.
Retained earnings appear on your balance sheet under the equity section. The bigger the number, the more profit your company has kept. If it goes down year after year, it could be a red flag.
Some tips to make retained earnings work for you:
- Keep good records – know your net income and dividend payments.
- Plan ahead – decide when to reinvest profits versus paying dividends.
- Review regularly – track changes to make smart financial moves.
Tricky situations? Let’s cover a few.
1. What if there is a loss instead of a net profit?
Subtract the loss instead of adding income. Your retained earnings will go down.
2. What if there are no dividends?
Great! All net income goes into retained earnings.
3. Can retained earnings be negative?
Yes. This is called an “accumulated deficit” and means your company has lost more than it has earned. Not great, but fixable with time and profit!
Want to track your retained earnings easily?
Use accounting software! Most programs calculate this for you automatically once you enter your profits and dividends. But it’s good to understand the math behind it so you can explain things to your accountant or investors.
A few last fun facts:
- Some companies keep all their profits and grow like crazy (hello, tech startups).
- Others pay out most of it to shareholders (looking at you, established corporations).
- It’s all about strategy and what your business needs now and in the future.
And remember, retained earnings aren’t dollars sitting in a vault. They’re part of your company’s value – often reinvested in equipment, inventory, or paying off debt.
So next time someone asks how your business is doing…
You can proudly say, “Let me tell you about our retained earnings.”
Go on, flex those numbers!
