Why might retained profit be considered the safest source of finance for a second factory?

• A. It guarantees fastest growth
• B. It may be safest if profits are already earned and reinvested
• C. It requires government approval
• D. It increases debt

Answer: (B)

Using retained profit, or internal financing, means the business funds expansion from profits it has already earned. This is considered the safest option for a second factory because there are no external obligations: no interest payments, no loan covenants, and no new claims on future profits. It preserves financial autonomy and liquidity, since the funds come from the company’s own cash flow rather than from borrowing or issuing new shares. This lower risk of over-leveraging makes it a conservative and stable choice for growth, especially when the business wants to expand without increasing financial pressure.

It’s worth noting that the amount available from retained profits depends on past profitability, so if profits are insufficient, funding through this route may not cover a large new factory. The other options involve external funding that introduces debt, dilution of ownership, or regulatory steps, which typically bring more risk or complexity.