How to calculate retained earnings for your business

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  1. Introduction
  2. What are retained earnings and why are they important?
  3. What is the formula for calculating retained earnings?
  4. How do you calculate beginning retained earnings?
  5. How does net income affect retained earnings?
  6. What role do dividends play in retained earnings?
  7. How can Stripe help calculate retained earnings?
  8. How do retained earnings appear on financial statements?

Financial statements are a key tool for tracking the health of your business, and one of the most important parts of the equity section of these statements is retained earnings. Retained earnings are the profits your business has accumulated over time that you keep, rather than distribute to shareholders as dividends.

Retained earnings represent the funds available for reinvestment – for expanding operations, launching new products, or paying down debt. Unlike with external financing, which might come with interest or an ownership stake, retained earnings allow you to fund your growth from within. This helps your business build financial stability.

Below, we’ll explain how retained earnings work, how they accumulate, how to calculate them, and why they matter for a growing business.

What’s in this article?

  • What are retained earnings and why are they important?
  • What is the formula for calculating retained earnings?
  • How do you calculate beginning retained earnings?
  • How does net income affect retained earnings?
  • What role do dividends play in retained earnings?
  • How can Stripe help calculate retained earnings?
  • How do retained earnings appear on financial statements?

What are retained earnings and why are they important?

Retained earnings are the portion of a company’s profits that are kept, rather than distributed as dividends to shareholders. These are typically used to reinvest in growth, pay down debt, or cover future expenses.

For start-ups, retained earnings are important because they act as a financial cushion and provide the capital for reinvestment without requiring start-ups to seek additional funding. Instead of relying on outside investors or loans, you use your business’s profits to fund new projects, hire more staff, or expand operations. This shows potential investors that your business is sustainable and can make your company more attractive when it’s time to secure future funding rounds.

Retained earnings are a key part of your financial health. They represent how well your business is doing and how you’re planning for future success.

What is the formula for calculating retained earnings?

Here is the formula for calculating retained earnings:

Retained Earnings = Beginning Retained Earnings + Net Income (or Loss) - Dividends

Here’s a breakdown of each component:

  • Beginning retained earnings: These are your retained earnings at the start of the period. It’s the balance from the previous year or quarter.

  • Net income (or loss): This is your company’s profit (or loss) for the period. If your business is making money, this number will be positive. If your business is losing money, it will be negative.

  • Dividends: If your company pays out any profits to shareholders, those payments are subtracted from retained earnings.

To calculate your current retained earnings, start with the previous balance, add your current profit, and subtract any dividends you paid out. Start-ups in the early stages might not be paying out dividends yet, so all their profits would become retained earnings.

Understanding retained earnings is important for start-ups because they show how much of your profits you’ve kept in the business to fuel future growth. It’s a key indicator of financial health and can help guide your reinvestment strategy.

How do you calculate beginning retained earnings?

Calculating your beginning retained earnings helps you understand how much profit your business has accumulated. At the start of a new period (e.g., a new fiscal year or quarter), your beginning retained earnings will be the balance of retained earnings at the end of the previous period. This amount is from the last period’s financial statements and can be found on your company’s balance sheet under the equity section.

  • Example: Imagine that your start-up’s balance sheet at the end of last year shows that you had $50,000 in retained earnings. That amount will be your beginning retained earnings for this year.

If you’re just starting your business, your beginning retained earnings will be $0 because you haven’t accumulated any profits yet.

The beginning retained earnings are the starting point for the new period. They are adjusted by any profits (or losses) your business generates and any dividends paid out to shareholders. Understanding this starting figure is key to calculating your current retained earnings for the new period.

How does net income affect retained earnings?

Net income plays a significant role in determining your company’s retained earnings because it directly impacts the profits you keep within the business.

Your business’s net income (i.e., net profit) is added to your retained earnings. If your start-up has a positive net income, you’re increasing the amount of money that can be reinvested into your business for future growth or used to pay down debt.

But if your business has a net loss (i.e., you spend more than you earn), it reduces your retained earnings. In this case, you’re exhausting the profits you’ve accumulated from past periods, which can affect your overall financial standing.

Net income drives the growth of your retained earnings. The more profits you generate, the more retained earnings you’ll have to reinvest in your business without needing external funding. Since retained earnings represent your business’s cumulative profits, a consistent positive net income provides a strong foundation for expansion and financial health.

What role do dividends play in retained earnings?

Dividends directly reduce a business’s retained earnings. When a company pays out dividends to its shareholders, it takes money out of the business rather than keeping it for growth.

Paying dividends is less common for early-stage start-ups because any profits need to be reinvested back into the business. However, if you do distribute dividends, they will impact your retained earnings.

  • Example: Once dividends are paid, they are subtracted from your company’s profits. If your company has $50,000 in retained earnings and pays out $10,000 in dividends, your new retained earnings will be $40,000.

If you are considering paying dividends, ensure that your business has enough retained earnings (and overall cash flow) to cover them. Paying out too much in dividends when you’re still in a growth phase could limit your ability to reinvest in the business, potentially hindering future expansion. As the business matures, you can consider paying dividends, but balance that against the need for reinvestment and sustainable growth.

How can Stripe help calculate retained earnings?

Stripe can help you calculate retained earnings by making it simple to track revenue, expenses, and payouts – all of which feed directly into financial statements.

Here are a few ways Stripe can help you calculate retained earnings:

  • Automated revenue tracking: Stripe automatically tracks all payments you receive, whether they’re one-time payments or recurring subscription revenue. This means you can easily find your total income for a specific period, which is the starting point for calculating net income (and, ultimately, your retained earnings).

  • Expense management: Stripe integrates with accounting tools such as QuickBooks and Xero to track expenses. By factoring in your expenses (e.g., platform fees, refunds, transaction costs), you gain a clearer picture of your net income, which affects your retained earnings.

  • Real-time reporting: Stripe gives you access to real-time financial data, enabling you to monitor how your income and expenses compare. This can help you see how much profit you’re generating (or losing) so you can calculate your retained earnings.

Stripe simplifies cash flow management, making it much easier to track everything that goes into your retained earnings calculation. By using Stripe to manage your payments and integrate with your accounting systems, you get a clearer, more accurate view of your retained earnings.

How do retained earnings appear on financial statements?

Retained earnings appear on your balance sheet, one of your start-up’s core financial statements, as the “leftover” profits that have been reinvested back into your business. They show up on the balance sheet as part of your equity.

Retained earnings represent the portion of your profits you’ve kept in the business rather than distributed as dividends. They contribute to your start-up’s “net worth” – the value left after subtracting your liabilities (e.g., loans, bills, accounts payable) from your assets (e.g., cash, inventory, equipment).

  • Start with beginning retained earnings: These are the retained earnings carried over from the previous period.

  • Add net income: This is your business’s profit during the current period. If you’re profitable, your net income increases your retained earnings.

  • Subtract dividends (if applicable): If your start-up pays dividends to shareholders, these will be subtracted from your retained earnings because it’s money you’ve distributed outside the company.

At the end of the period, the balance in the retained earnings section represents the cumulative profits your start-up has retained over time, which are available to reinvest in the business or pay down debt.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.

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