As a small business owner, you know that the numbers on your balance sheet matter. But what do those numbers mean? In this blog post, we’ll dive into one of the most important figures on the balance sheet—retained earnings—so that you can understand why it matters and how it can affect your bottom line.
What are Retained Earnings?
Retained earnings, also known as “accumulated profit,” or “profits retained,” is the amount of money left over after a company has paid its expenses and liabilities. This money is then reinvested in the business to cover future expenses or to expand operations. The amount of retained earnings is reported on the balance sheet each quarter or at the end of each financial year. It’s important to keep track of retained earnings because they represent a company’s history of profits and losses, as well as its ability to pay off debt in the future.
In order to calculate retained earnings you’ll need to know two other pieces of information – total equity and net income. Total equity is simply the sum of all assets minus all liabilities, while net income is calculated by subtracting all expenses from revenue for a given period (usually quarterly). To calculate retained earnings, simply subtract total equity from net income – it’s that easy!
Why Should You Care About Retained Earnings?
Retained earnings are an important figure for any business owner because they provide an indication of how profitable your company has been in recent years. If you have high retained earnings, it means that your business has been able to maintain a healthy level of profitability over time; if not, it could indicate that there are issues with cash flow or that you may need to make changes in order to improve profitability going forward. Additionally, having high levels of retained earnings can be attractive to potential investors or lenders who might be interested in providing additional capital for growth or expansion opportunities.
Retained earnings are an important indicator of a company’s financial health and overall profitability. While calculating them may seem daunting at first glance, understanding how they work will help you get a better grasp on where your business stands now and where it could go in the future. Knowing this key piece of information will also make it easier for potential investors or lenders to assess whether they should provide additional capital for growth opportunities down the road. Put simply – if you want your business to succeed long-term, understanding what retained earnings are and tracking them carefully is essential!
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