Retained earnings are the running total of all profits ever kept in the business, minus all losses and distributions. If the business earns $50,000 this year and distributes $30,000, retained earnings grow by $20,000. Over time, retained earnings reflect the history of the business's financial decisions.
Where retained earnings live
Retained earnings appear in the equity section of the balance sheet. Along with paid-in capital, retained earnings make up owner's equity. A business with large retained earnings has been consistently profitable and has left money in the business.
Retained earnings and distributions
Distributions come out of retained earnings. A business that distributes more than it earns has shrinking retained earnings. A business with negative retained earnings has distributed more over its lifetime than it has earned — meaning the owner has borrowed against the business's balance sheet.
Why retained earnings matter for growth
Retained earnings fund growth without debt. Crabtree's Simple Numbers framework encourages building retained earnings deliberately — specifically through funding core capital reserves before distributions, not after.
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