How Does Retained Earnings Work for Businesses?
Industry Insights
Retained earnings refer to the portion of a company's net income that is kept or "retained" within the business instead of being distributed to shareholders as dividends. Over time, retained earnings are reinvested into the company to fund operations, pay down debt, or invest in growth initiatives. They represent a critical component of a company's equity and indicate how much profit the business has accumulated since inception.
For businesses, retained earnings act as an internal source of financing. Instead of seeking external funding like loans or issuing new shares, companies can use their retained profits to invest in research and development, upgrade equipment, expand operations, or improve financial stability.
Each period, a company calculates its retained earnings by adding net profits to the previous period’s retained earnings and subtracting any dividends paid to shareholders. A growing balance of retained earnings often signals a healthy, expanding business, while a declining balance may require closer scrutiny.
How to Calculate Retained Earnings
Calculating retained earnings is relatively straightforward using the following formula:
Retained Earnings = Beginning Retained Earnings + Net Income - Dividends Paid
Example:
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Beginning Retained Earnings: $50,000
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Net Income for the Year: $20,000
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Dividends Paid: $5,000
Calculation:
Retained Earnings = $50,000 + $20,000 - $5,000 = $65,000
This shows the company has $65,000 in retained earnings at the end of the year to reinvest back into the business.
Advantages and Disadvantages of Retained Earnings
Advantages:
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Self-financing: Companies can fund expansion without external borrowing or issuing shares.
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Financial stability: Higher retained earnings can improve a company’s balance sheet and creditworthiness.
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Shareholder value: Reinvesting profits wisely can lead to higher company value over time.
Disadvantages:
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Lower immediate returns for shareholders: Retaining earnings means less cash distributed as dividends.
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Misallocation risk: Poor investment decisions with retained earnings could reduce overall profitability.
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Tax implications: In some cases, retained earnings might be taxed depending on local regulations.
Reduce Costs and Retain More of Your Earnings with PhotonPay
While managing retained earnings internally is important, reducing operational costs and payment fees externally can significantly boost your company's net income — and PhotonPay can help.
PhotonPay offers an all-in-one global payment solution that enables businesses to process transactions efficiently, reduce payment processing costs, and enhance cash flow management. With lower fees, real-time transaction monitoring, and multi-currency support, you can retain more of your earnings and reinvest in growing your business.
By choosing PhotonPay, businesses not only optimize their payment operations but also build stronger financial foundations — turning today's savings into tomorrow’s retained earnings.
Start maximizing your retained earnings today with PhotonPay!
About PhotonPay
Founded in 2015, PhotonPay is a digital financial infrastructure provider offering global payment solutions to businesses. Our innovative core products include Global Accounts, Card Issuing, Online Payments, Payouts, FX Management and Embedded Finance. PhotonPay has become a Mastercard issuer in Hong Kong and the fintech card issuer in the Greater China region of Discover® Global Network.
With a strong compliance culture and technological innovation capabilities, PhotonPay is building a digital payment network to take the friction out of global payments and enhance operational efficiency for businesses operating on a global scale.
Headquartered in Hong Kong and providing localized services through nine international offices, PhotonPay partners with a network of top-tier banks and global financial institutions and serves more than 200,000 customers globally.
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