Retained Earnings
The cumulative profit a business has kept and reinvested over its life, after subtracting owner draws or distributions.
Definition
Retained earnings is the running total of all the profit your business has ever made, minus everything paid out to the owners as draws, distributions, or dividends. If your business earned $60,000 over three years and you took $45,000 out, retained earnings is $15,000—profit that stayed in the business as cash, equipment, or other assets.
It lives in the equity section of the balance sheet, and it updates at each year-end close: the year's net profit rolls in, and owner payouts roll out. Note that retained earnings is not a pile of cash—it's an accounting measure of accumulated, undistributed profit. A business can have $50,000 of retained earnings and only $5,000 in the bank if profits were spent on equipment or are tied up in unpaid invoices.
Why It Matters
Retained earnings tells you whether your business is building wealth or just paying your salary. Consistently near-zero retained earnings means every dollar of profit goes straight out the door—fine by choice, risky by accident, because the business has no cushion for a slow quarter or a surprise tax bill. Growing retained earnings is how a business self-funds equipment, hiring, and dry spells without borrowing.
Lenders read it the same way: healthy retained earnings signals a business that can absorb losses and repay debt, while negative retained earnings (an accumulated deficit) is a red flag on any credit application. For S corporations and partnerships, the related balances also interact with how much you can distribute tax-free, so it's worth reviewing with your accountant before large payouts.
Examples
- 1
An agency earns $80,000 net profit and the owner takes $60,000 in draws; retained earnings grows by $20,000 that year.
- 2
A studio with $45,000 in retained earnings buys $30,000 of gear outright—no loan needed—because past profits stayed in the business.
- 3
A freelancer's LLC shows -$8,000 retained earnings after two startup years of losses, something a lender asks about on a credit line application.
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