Retained profit

• What are retained profits used for in a business?

  To invest using historical profits
• How are retained profits calculated over three years with a profit of £2 million each year?

  £6 million from three years of £2 million
• Why are retained profits considered long-term finance?

  They come from profits made in previous years
• Why are retained profits classified as internal finance?

  They originate from within the business
• Why are retained profits not applicable to startup businesses?

  Startups lack historical profits to retain
• What are the pros and cons of using retained profits?

  Pros:

  • No financial cost (no interest)
  • No loss of control over the business
  • Low-risk approach to expansion

  
  

  Cons:

  • May create conflict with shareholders
  • Finite amount limits growth potential
  • Lack of added expertise from external sources
• How can using retained profits create conflict with shareholders?

  Less retained profits may reduce dividends
• What is a limitation of retained profits regarding growth?

  They are finite and limit growth speed
• Why might relying solely on retained profits be seen as slow for business growth?

  Other sources like debt and equity grow faster
• What expertise might be missed by using only retained profits for growth?

  Expertise from banks and investors
• Why are retained profits considered the cheapest source of finance?

  They incur no interest costs
• What is the main limitation of retained profits?

  There is a limit to their availability