Retained earnings (sometimes called retained profit or revenue reserves) are the portion of a company's net profits accumulated over its lifetime that have not been paid out to shareholders as dividends. They appear in the equity section of the balance sheet and represent an internal source of funding the company can draw on for investment, debt repayment, or weathering difficult trading periods.
How retained earnings build up
At the end of each financial year, net profit is added to the retained earnings balance; dividends paid are subtracted. A sustained period of profitable trading without heavy dividend distributions will build a strong retained earnings position. Conversely, accumulated losses reduce — and can turn negative — the retained earnings figure, sometimes called a deficit on the profit and loss account.
Why retained earnings matter to lenders
A healthy retained earnings balance signals financial resilience. It suggests the company has historically generated genuine profit and has chosen to reinvest it, creating a cushion against future losses. A persistent deficit, on the other hand, raises questions about whether the business has been commercially viable over time. Lenders look at retained earnings alongside EBITDA and cash-flow trends to form a rounded view of creditworthiness.
Retained earnings versus cash
Retained earnings are an accounting figure, not a cash balance. A company can have large retained earnings but very little cash if profits have been absorbed by fixed asset investment or working capital growth. The cash-flow statement is the right place to assess actual liquidity.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: What is capital expenditure and how does it differ from operating costs?, What does EBITDA mean in business finance?.