Understanding
Retained Earnings
Est. reading time: 6 min
Retained earnings might sound like a complicated financial term, but it’s just the money your business keeps after paying expenses and distributing profits to owners or shareholders. Think of it as the savings your business can use to grow, invest, or handle unexpected costs.
What Are Retained Earnings?
Retained earnings are the portion of your business’s profits that you decide to keep instead of distributing them as dividends or owner withdrawals. These funds can be used for reinvesting in your business, such as buying new equipment, expanding operations, or saving for future needs.
For example, if your business earns $10,000 in profit and you take out $4,000, the remaining $6,000 becomes retained earnings.
How to Calculate Retained Earnings
Calculating retained earnings is straightforward. You start with your retained earnings balance from the previous period, add your current net income, and subtract any dividends or owner withdrawals. Here's the formula:
| Retained Earnings = | Beginning Retained Earnings + Net Income - Dividends/Withdrawals |
Let’s say your beginning retained earnings are $5,000, your net income is $3,000, and you withdrew $1,500. Your retained earnings would be:
| Retained Earnings = | $5,000 + $3,000 - $1,500 = $6,500 |
Your retained earnings for the period would be $6,500.
Why Retained Earnings Matter
Retained earnings play a critical role in the financial health of your business. Here’s why they matter:
- Support growth: Retained earnings can fund expansions, new products, or hiring more staff without relying on loans.
- Build a safety net: Keeping earnings in reserve helps your business stay afloat during tough times.
- Increase business value: A healthy retained earnings balance makes your business more attractive to potential investors or buyers.
The Docelf Advantage
Keeping track of your income and withdrawals is key to managing retained earnings. Docelf makes it simple with tools for invoicing, estimates, and quotes. Here’s how we help:
- Professional invoicing: Send polished, branded invoices to ensure timely payments and steady cash flow.
- Accurate estimates: Create clear, detailed estimates so you can plan your projects and profits effectively.
- Organized tracking: Keep all your financial documents in one place to monitor retained earnings over time.
Ready to streamline your business finances? Try Docelf today and simplify the way you manage your income and growth.
