Retained profit is the profit kept in the company rather than paid out to shareholders as a dividend. Retained profit is widely regarded as the most important long-term source of finance for a business.
Not all businesses make a profit. But when they do, the owners face a choice:
• Take the profit out of the business – either as personal income or via a payment to shareholders
• Effectively reinvest the profit by leaving it in the business
Of course the owners can decide to do a little of both – pay a limited dividend and leave the remaining part of the profit in the bank.
Retained profits are an important and attractive source of finance for most profitable businesses. Why?
- Retained profits are a very cheap form of finance. What is the cost? Really it is only the return that shareholders could earn if they had their dividend payment (this is known as an opportunity cost). In cash terms, retained profits are “free” to the business – there is no interest to be paid.
- Retained profits are also very flexible. They can be left in the business as cash in the bank. They can be invested in more fixed assets, extra stocks and so on.
- Retained profits are also under the control of the business. It is up to the business owners to decide what to do with them, not the bank manager.
FOR MORE REVISION SUPPORT FROM THE TUTOR2U TEAM...
Use the following class codes to join our Zondle revision classes:
Economics: AS Micro 290-66327 AS Macro 290-66328 A2 Micro 290-66329 A2 Macro 290-66330
AQA AS/A2 Business: BUSS1 290-66325 BUSS2 290-66326 BUSS3 290-66323 BUSS4 290-66322
The cameras went behind the scenes at one of tutor2u's exam coaching & revision workshops this summer...
Discover more about our intensive exam coaching & revision workshops desiged to prepare for exams in May & June 2015:
|PowerPoint Lesson Activities||Teacher Conferences & CPD Courses|
|Exam Coaching & Revision Workshops||Pre-release Case Study Toolkits|
|A Level Economics Teaching Support||Resources for Business Studies|