KNEC Revision Questions and Answers
State three advantages of using retained earnings as a source of finance (from KNEC Past papers 2013 July)
Retained earnings offer significant benefits to a business using it as a source of finance. It allows the firm to reinvest its income and grow itself without the need of external financing. The three reasons of using retained earnings as a source of finance are:
- The owner of the business does not need to pay the money back. It does not need to be paid back with interest like a bank loan.
- Retained earnings also allow the business owner to take full control of his business as opposed to other sources of finance such as venture capital or equity funding which allow other shareholders to take part in management of the business.
- It provides funding for research and development because the company can reinvest its earnings to promote growth through research.
Retained earnings provide significant benefits and advantages to business owners as a source of finance. It is an easy way of raising income which allows the business to build a safety net through liquidity in the form of retained profits or revenue streams.
