What is a smart decision when it comes to retained earnings and dividends?

When your business is profitable, you need to make a smart decision depending on your business condition. Shareholders will always want a dividend because they want their money right away, while managers will prefer to reinvest so that the business has more capital in the future.?

Here are the pros and cons of both sides of the argument -?

‘Retained earnings’ as sources of long-term finance are a method of self-financing and also known as plowing back of profit.

• The use of retained earnings does not involve any acquisition cost. The company has no obligation to pay anything for retained earnings.
• Retained earnings strengthen the financial position of a company, then give financial stability to the business and also appreciate the capital which ultimately increases the market value of shares.
• The huge accumulation of retained earnings might lead to over-capitalization.
• If retained earnings do not allow shareholders to enjoy the full benefit of the actual earnings of the company, this may create dissatisfaction among the shareholders.?

The dividend is one of the important ways in which the companies communicate their financial health and shareholders’ value to the general public. The following are some important points to consider when making a dividend decision.

• Investors are more interested in a company that pays stable dividends. This assures them of a reliable source of earnings, even if the market price of the share dips.
• Investors prefer companies with a track record of paying dividends as it positively reflects their stability.
• When a company makes such payments, it decreases its retained earnings. Debt obligations and unexpected expenses can arise if the company does not have enough cash.
• Paying dividends results in the reduction of usable cash, limiting the company’s growth. The company will have less money to invest in business growth.

Therefore We hope that you will make the right decision about your profitability by considering the consequences of both slides. Also, feel free to contact us if you need assistance with your dividend decision.