Retained Profits

• Is retained profits short or long-term finance?

  Long-term
• What is retained profits?

  Profit that is kept and invested from previous years of success
• What type of cost does retained profits have to shareholders?

  Opportunity cost
• Retained profits can be kept in the business or paid out as dividends
• What are the main benefits of retained profit?

  • Business owners will not lose any control of the business
  • Low cost but not no cost
  • Can be a large amount if large profits
• What are the main drawbacks of retained profit?

  • Loss of finance if business makes a loss
  • Cash flow could be hurt if most of retained profit paid in one time
  • Opportunity cost for shareholders
• For what type of businesses could possibly not use retained profits?

  New business ventures and those not making a profit
• Retained profit can be popular with small firms and those unwilling to take much risk
• Retained profits incurs no costs such as interest which would be charged on a bank loan
• If the business uses retained profit the owners will not lose any control of the business unlike using share captial or venture captialists
• What conflict can happen when using retained profit?

  Conflict between managers and shareholders. Shareholders may prefer profit to be given to them as dividends.
• If all the retained profit leaves the firm at the same time what can that hurt?

  Cash flow unlike a loan where payments can be spread over years