Question

Explain Retained Profits as sources of long term finance.

Answer 1

• The amount of net profits that a corporation keeps for future growth and expansion rather than paying out as dividends to shareholders is known as retained profits.
• An internal, self-generated source of funding is created when these gains are normally moved to general reserves annually.
• Since there are no interest payments or ownership dilution involved, retained profits are an affordable source of funding.
• They lessen reliance on outside capital, improve the company’s creditworthiness, and offer financial stability. But if retained earnings are used excessively, payouts to shareholders may be restricted, which might undermine investor trust.