You’ve probably seen these two terms on your monthly financial statements. Maybe you’re not sure what they mean, how they’re different — and if it really matters.
Here’s a quick overview to help you better understand the financial health of your business.
This number is the money you have left after you’ve paid your expenses. For example:
Sometimes called member capital, this is what’s left from your profits after you pay out dividends to shareholders. It also includes your retained earnings to date.
The formula for calculating retained earnings is:
Beginning retained earnings + net profit – dividends = retained earnings.
In the following example, we assume you have two shareholders who each get $1,000 in dividends:
If you don’t have any shareholders, your calculation would look like this:
Your retained earnings could also reflect a loss, as in this example:
Why It Matters
Since this number shows your total retained earnings for the year, lenders and investors like to look at it when deciding whether to trust you with their money. It gives a clearer picture of your business than just looking at monthly figures, which can vary quite a lot depending on a wide range of factors.
Retained earnings also serve as an indicator of where to put that money.
• If the number is low, it would be better to keep the money in the business as a cushion against cash flow problems, rather than handing it out as dividends.
• If both net profit and retained earnings are substantial, it’s time to invest in growing your business, perhaps with new equipment or facilities.
Knowing your financials is essential to business success. Xendoo puts those key numbers at your fingertips with our exclusive app that you can access from anywhere, anytime. Plus, our CPA team will help you understand what the numbers mean, so your business can keep moving in the right direction.