What is Retained Profit?

Retained profit refers to the portion of net profit that a business keeps, rather than distributing it to shareholders as dividends. This reinvestment into the business allows for growth, funding for new projects, and strengthening the company’s financial position. By retaining profits, a business can finance future expenditures such as purchasing new equipment, expanding operations, or improving its services without needing to seek external financing or loans. This approach demonstrates a commitment to long-term growth and sustainability.

In contrast, distributing profits among shareholders reduces the funds available for reinvestment, which can limit growth opportunities. Profit lost due to operational costs does not contribute to retained earnings, and total revenue from sales does not account for expenses, making it an inappropriate definition of retained profit. Thus, the correct identification of retained profit highlights its significance in a company's financial strategy.