Retained Earnings

The profits that a company has earned to date, less any dividends or other distributions paid to investors. This amount is adjusted whenever there is an entry to the accounting records that impacts a revenue or expense account.

Why is this important? Key ratio alert. This is the “nest egg” for the next project. Also an important alert to analysts about health of the company.

You know when you eat really salty food and the next day you have cankles? Yeah, been there, done that. It's all that water desperately trying to get you to wiz out the loads of sodium chloride in your body. That’s retained water.

Well, retained earnings sorta work the same way. You run a plastic cup stamping business with catchy little phrases on the cups. Last year you had a million bucks in sales and 100 grand in after tax earnings.

About 80 grand of that earnings was, in fact, cash. Why less than 100? What happened to that 20 grand in cash, and how did it...evaporate?

Well, you had to spend cash out of your earnings on a cup-plunging machine, and that cost real dough. You’ll amortize that cost over time now, and get essentially a tax break because of it. So...this year’s 100 grand was a nice year. But last year you had 50 grand in cash profits.

And you had 20 grand in cash profits the year before then. And before then you had run at just cash break even for the previous 5 years. So in total you saved, or rather you retained, earnings of 80 plus 50 plus 20, or a sum total of 150 grand. That all now sits in your B of A account doing a whole lot of nothing other than earn 2 percent a year for the privilege.

That 150 grand is your cumulatively retained earnings, which you will now use to print more catchy titles in foreign languages.

Uh...maybe don’t look up what those mean...