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Investing Retained Earnings

Phill Holland, founder of MOBI, provides guidelines on how to invest your retained earnings in a way that increases the value of your company and brings benefits to the company. 

One pleasant challenge as you grow the business is to decide how to invest retained earnings you build up over time. You'll need to know what options are available and also be qualified to make comparisons of the potential benefits of each of them. Here are some choices you have available. One choice of course is to hold on to the cash, that is to retain the earnings. The value of holding onto cash will be the earnings you receive from the investments less the cost of living increases over time. There is the safety factor value in having cash to provide a margin of safety during hard times or having cash to exploit unusual opportunities that come up. Retained earnings can also be paid out as dividends to yourself for your shareholders, but you will need to account for various restrictions on withdrawals as well as tax consequences, so you'll need some advice here from your attorney.
 
Another option for use of retained earnings would be to keep up with your competitors who may be installing more cost effective systems that could put you at a disadvantage. Incidentally, if you're required to use retained earnings to stay competitive, there should be a warning flag to you because it's not a good idea to be in a business where your retained earnings are going to be eaten up to simply stay alive. Much better to be in a business where retained earnings can be used to add value rather than to stay competitive.
 
An important option to consider is to invest your retained earnings in growing the business. If you're operating a store you can invest in a second store at worst and start a chain, or invest in research or product development or expand by acquisition of your suppliers, distributors, or even competitors. But regardless of how your retained earnings are used, you should calculate the estimated return on investment your cash will produce and make sure each dollar you invest will potentially increase the value of your company by at least one dollar as well as produce earnings into the future.