Retained earnings For profitable businesses like Outdoor World, the accumulation of profits from positive cash flow can result in large sums of money being available for meeting short-term, medium-term and long-term financial needs. Retained earnings (also known as reserves) refer to profits retained in a business. Retained earnings are the ideal source of finance for any business.
Amount
Cost Risk
LO 2.11
The amount of money available can be small or large depending on how much profit the business has retained.
No costs involved. No risk to the business.
8. What are the main sources of short-term business finance?
Trade credit
Like most businesses Outdoor World often gets trade credit of 30 days from the firms from which it buys stock. This means that it has up to a month after delivery to pay its bills. Trade credit means buying goods now but paying for them later.
Amount
The sums of money available may be large depending on the size of the purchases.
Cost
It can mean missing out on the discounts available for paying cash up front. A firm may be given a poor credit rating if it is frequently late paying its debts.
Risk
No security is required, but suppliers can retain ownership of the goods until payment is made. Also, the reputation of the business may be damaged if the business is too slow paying its bills.
Overdrafts
Most businesses will have a current account with a bank to manage day-to-day finances. Banks may give a business an overdraft as part of a current account. An overdraft is permission to spend more money than is actually in the current account. The maximum amount of such loans is agreed in advance with the bank.
