Contents:
What are retained earnings?
Retained earnings are part of a company's equity: the accumulated financial result remaining after losses and distributions to owners have been taken into account. They may include profits from several years. A negative accumulated result represents an accumulated deficit.
The existence of retained earnings does not automatically create a debt to the founders. Payments to owners require a separate decision and compliance with the applicable rules. The equity figure also differs from the cash balance in the bank: funds earned may have been invested in equipment or inventory, or may be held in accounts receivable.
In a simple example with no other adjustments, retained earnings at the end of a period equal the opening balance plus net profit for the period minus distributions to owners. Actual financial statements may include other changes. The distinction between equity, accumulated earnings and cash is explained in the OpenStax textbook, section 14.4.
How can you use retained earnings?
Owners can choose one of three approaches. Before deciding, check the cash available, future obligations, project needs and any restrictions on payments that apply to your company.
1. Distribute earnings to owners
Part of the accumulated profit can be paid as dividends when there is a lawful basis for doing so. Withdrawing all available cash without leaving funds for obligations and growth may leave the company short of working capital.
2. Pay part to owners and retain part in the business
This approach combines income for owners with funding for projects and growth. The split depends on the company's needs: there is no universal mandatory percentage for dividends or reinvestment.
3. Retain earnings in the company
During difficult periods or expansion, owners may decide against distributing profit. Funds can be used for working capital needs, investments and a financial cushion. For more on planning savings, see the article about a reserve fund (in Russian).
An equity reserve in accounting and a cash reserve for payments are different things. Transferring an amount between equity accounts does not itself create cash in a separate bank account; a cash cushion needs to be planned and built separately.
Where can you find retained earnings on the balance sheet?
Look for the figure within equity. For example, in the Russian financial statements of a commercial organization, line 1370 is called "Retained earnings (accumulated deficit)." This is confirmed by Russian Federal Accounting Standard 4/2023, Appendix 10, balance sheet item codes (in Russian). The code belongs to the Russian reporting form; the form and line name may differ in other countries.
An annual balance sheet shows the position at the reporting date. Net profit for a single period shows the result for that period, while retained earnings show the accumulated balance taking previous results and distributions into account. Neither figure substitutes for the other.
In management accounting, it is useful to monitor project profits, cash balances and obligations separately. In the 101 app, the PRO+ plan includes advanced analytics and the Company Fund for tracking shared expenses. These data help you make decisions; a management report does not replace the accounting balance sheet or the calculation of permissible dividends.
How can you plan payments to owners and the team?
Agree in advance on the remuneration rules for project managers and other employees: which results earn a bonus, how expenses are taken into account and when payment takes place. Dividends to owners and payments for the team's work have different purposes.
The four illustrative ways of allocating a management budget based on project results are retained below. They are examples for discussion, with no mandatory rules on the number of managers or the percentages. The base is an illustrative project result after ordinary expenses but before the bonuses specified in the example. Employee bonuses are recognized as expenses; once they have been calculated, net profit and the permissible amount of payments to owners need to be determined again.
| Illustrative budget shares | Team composition | How to read the example |
|---|---|---|
| 60/40 | One manager who also runs the construction site | 60% is planned for payments to the owner and 40% for the company's needs. The actual payment depends on net profit and available cash. |
| 30/30/40 | A founder and one or two employed site supervisors | 30% is planned for the owner, 30% for the site supervisors' combined bonus budget and 40% for the company. The supervisors' share is collective; it is not 30% for each supervisor. |
| 20/25/25/30 | A founder, three site supervisors and a construction manager | 20% is planned for the owner, 25% for the site supervisors' combined bonus budget, 25% for the construction manager and 30% for the company. Changing the shares requires recalculating the entire allocation so it totals 100%. |
| 20/25/20/10/10/5/10 | A founder, site supervisors, a construction manager, sales, marketing and a regional manager | 20% is planned for the owner, 25% for the site supervisors' combined bonus budget, 20% for the construction manager, 10% for sales, 10% for marketing, 5% for the regional manager and 10% for the company. This is one possible budget, with no mandatory minimum for growth. |
The shares total 100% in every example. Percentages do not guarantee that there will be enough cash: prepare a separate payment plan, check obligations and allow for the reserve you need. Sales and marketing costs must not be included in the initial expenses and then deducted again from the same base.
To understand management accounting and prepare your own allocation, read the article on sharing project results with employees and compare it with your project data. Agree on bonus terms, accounting treatment and owner distributions with specialists who know the rules that apply to your company.
