1. The problem involves understanding the benefits and drawbacks of retained profits as a source of long-term finance for a business. 2. Retained profits are the portion of net profits that are reinvested in the business rather than paid out as dividends to shareholders. 3. Benefits include: - It is a cheap form of finance because no \textbf{interest} has to be paid. - Business owners have complete control over how profits are reinvested and the proportion kept in the business rather than paid out as \textbf{dividends}. 4. Drawbacks include: - If a business needs temporary finance due to difficulties, it is unlikely to have any \textbf{flexible} funds it can use. - Growth may be slow if dependent on retained profits, as profits may not be \textbf{high} enough to finance rapid growth. - Using too many profits in the business may upset \textbf{shareholders} who may feel their dividend payments are too low. 5. Retained profits do not dilute or reduce the \textbf{ownership} of the organisation. For companies, there is no risk of a takeover. 6. Summary of key terms filled in: - No \textbf{interest} has to be paid. - Business owners control reinvestment and proportion kept rather than paid as \textbf{dividends}. - Unlikely to have \textbf{flexible} funds for temporary finance. - Profits may not be \textbf{high} enough for rapid growth. - May upset \textbf{shareholders} due to low dividends. - No dilution of \textbf{ownership}. This completes the explanation of retained profits in finance.