Question

Advantage and disadvantage of retained earnings financial management

Answer 1

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ADVANTAGE:

The main advantage of having retained earnings is for small businesses to have financial resources to reinvest in their operations, creating growth. Retained earnings fund several projects such as research and development and facility construction, renovation and expansion.

DISADVANTAGE:

Retained profits have several major advantages: They are cheap (though not free) – effectively the "cost of capital" of retained profits is the opportunity cost for shareholders of leaving profits in the business (i.e. the return they could have obtained elsewhere)

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