Advantages and disadvantages of retained earning in a business or company?


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Connor Sephton answered
Retained earnings in a business or company can be a big advantage and help out the business in a number of ways. When a company does not spend their earnings, they are allowed to keep it. However it is only possible to obtain these advantages depending on the success of the business or company.

Some of the advantages of retained earning include:

• The company or business has self dependence and when it needs funds it has its own available rather than having to ask anybody for loans. The business would therefore save on interest as, without having to pay loans, there is no interest to be paid off. The business is able to keep certain information secret, which they may not want to let out to other companies. This is not something that is possible when paying loans.
• Equity would be building up within the business or company, which would therefore increase the values of its shares.
• There will always be some money behind the company to help it through tough financial times if they were to be in the situation to need it. The earnings made can be used within the business to buy their own new computers or vehicles, for example, to help development.

Some of the disadvantages of retained earning include:

• The earnings made will be taxed and dividends also have to be paid out.
• By retaining earnings, the business is depriving its shareholders of the money that they are owed.
• If the retained earnings are not used wisely for a long period of time, the company could end up wasting a lot of the money they have made. They should be prompt with company development.
• If the net loss becomes greater than the first retained earnings, you then create a negative result.

If a business or company is successful they will be able to use their retained earnings to push themselves forward and give the business a boost. Putting money into research and developments that will help to raise the earnings, would give them even more opportunities in the future.

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