Retained Earnings, Profits Organization Keeps Back Used as Fund Operations Growth

Retained Earnings, Profits Organization Keeps Back Used as Fund Operations Growth

Retained earnings are profits that organization keeps back and is used to fund its operations and growth. There are several characteristics that make retained earning as the best source of finances for long term funding. Retained earnings are important for long-term funding given that nobody can demand their payment as they are generated internally by the organization.

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With retained earnings, there is no additional equity to be issued, and thus there is no dilution of ownership and control that make the owners of the business to retain and control it for the long term. Retained earnings, which are an internal source of finance are less costly given that there is no other cost attached to it such as the obligation to pay interest and installment payment. Investing retained earnings in projects will have a positive impact on shareholders’ wealth as there would be no reduced funding as a result of payment of debt to external agencies and thus, the management of the organization will have retained the main objective of maximizing the value of shareholder’s investment (Reeve et al., 2007).

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The main disadvantage of retained earning is that it is slow and relatively smaller compared to other sources of financing, such as debt and thus, the organization or business risks missing a business opportunity in its quest to accumulate the requisite funds through retained earnings. Although it prevents losing some control, using retained earnings may deny an organization the important experience in expanding the business through new investors and players in the business (Reeve et al., 2007).
An example of an organization that utilizes wisely retained earning is Berkshire Hathaway, which is owned by

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By admin in Essays on October 26, 2015