Why retained earnings matter to a first-time founder
Retained earnings show how past profits and losses, after distributions, have accumulated within the company’s equity. They can support reinvestment and reassure lenders, but they do not show how much cash is available today. A profitable company may have spent the money on stock, equipment or unpaid customer invoices.
Examples of retained earnings
A company starts the year with ₦40 million of retained earnings, makes ₦25 million net profit and pays ₦5 million in dividends. It ends with ₦60 million of retained earnings. That does not mean ₦60 million sits in the bank, because the company may have used cash to buy equipment or fund working capital.
Common misunderstanding
Retained earnings are not a separate savings account and are not the same as revenue. Revenue records sales, while retained earnings accumulate net profits and losses after dividends over the company’s life. A negative balance can arise from cumulative losses even when the current month is profitable.
When to use it
Review retained earnings when considering dividends, preparing financial statements or explaining changes in shareholders’ equity. Reconcile the opening balance, profit or loss, distributions and corrections. Before paying a dividend, check available cash and the legal rules for distributable profits rather than relying on this balance alone.