Retained Earnings - Your Company's Net Worth

Retained earnings or shareholders equity is an important bucket because is can be likened to the companies internal bank account.

They represent the net worth of the company, that is the amount of assets greater than the outstanding liabilities of company.

Without a reasonable surplus of assets over liabilities a company may be vulnerable to lenders wishing to restrict credit and shareholders may face a capital call.

A capital call becomes necessary when all other forms of credit are exhausted causing the Board of Directors to require all shareholders to infuse their own capital into the company.

Capital calls are not common in companies that keep sufficient retained earnings or shareholders equity. They are more common in partnerships that remove all profits each year.

Companies that operate in a partnership type distribution model could be harming their succession planning opportunities.

Retained Earnings should be sufficient enough so as to not put the company into any financial strain in the event of a downturn in the market.

The Board of Directors may decide it is appropriate to leave more money in if they have decided to make a strategic acquisition or merger.

What is the best amount to leave in retained earnings or shareholders equity?

This is something that will need to be continuously adjusted to ensure the company is in the best position to attract the right shareholders and support a healthy succession planning model.

Profit Distribution