5 Best ways to reinvest your business’s profits
Congratulations! Your startup has developed some giddy-up. Sales are robust. Costs are stable. And a steady stream of profit means you have an enviable business problem: what to do with that extra cash.
The first place you may go is to your own long-suffering paycheck. That’s not a bad thing. You need to pay yourself a decent salary if you want to keep yourself as an employee.
But don’t stop there. Reinvesting your profits back into your business can fuel a cycle of growth that will deliver more profits and, hence, more options for further growth. The trick is to balance the desire for that growth against the need for financial stability. Here are some pointers to help you decide which areas of the business you should reinvest in.
Make sure reinvestment is a part of your big picture
Ideally, you have set up a well-researched business plan that maps out your business goals and the expenditures necessary to fulfill them. Projecting and managing your profits should be a part of that document. Follow that plan faithfully, revising it only to accommodate new economic conditions. This will help you avoid the twin pitfalls of hoarding profits (out of short-term fear) or unwisely spending them (on a whim).
- Rank your reinvestments’ ROI (return on investment). You can start by asking which areas of your business need reinvestment the most: Administrative support? Sales? Marketing? Debt retirement? Equipment? Then ask yourself: Which investment opportunity will produce the biggest ROI?
- Don’t be surprised if you come up with more than one answer. You may need new equipment to deliver a better-quality product over the long run. But you may find that a bump in your marketing budget will bring in more cash this quarter, which is when you need it. Can you structure your reinvestments so that these differing timelines work to your advantage – a shorter-term ROI followed by one that takes longer to mature?
- Sequence your reinvestments so that they work together. For instance, if you decide to invest in new machinery that will dramatically increase product output, you might want to make sure your employee training or new hires budgets are ready to handle the uptick. An infusion into your marketing budget may also be advisable if you want to keep your new inventory moving.
- Hold your reinvestments accountable. Ask yourself what short- or long-term goals will be met with each investment you make. What performance metrics will tell you that this investment is worth it? Are you ready to monitor those indicators? How will this investment benefit your business one, five, or 10 years down the road?
Make sure you can identify your profits
Once you have a plan, make sure you understand how your profit margin fits into that picture. For instance, your business may have great cash flow but still not be turning a profit. It’s important that you know the difference. Technically speaking your profits are equal to your business revenue minus your business expenses. For further consideration:
- Update your assessment of company profits. You can run a simple profit-loss software program to get a quick snapshot or you can have your bookkeeper analyze your long-term profitability using EBITDA (earnings before interest, taxes, depreciation and amortization).
- Taxes are a business expense, but they can be leveraged to your advantage. You can lower your tax liability simply by spending some of your profits on a business expense, like a new piece of equipment. Your business gets a boost and your taxes are reduced. Forego this, and you can count on putting aside between 25 and 30 percent of your profits to pay your tax bill.
- Debt can be a drag on profitability. Whether it’s a business credit card or a business loan, remember to set aside some of your profits for retiring or even refinancing debt. In addition to solidifying your business’s financial footing, the timely retirement of debt will impress potential investors and give you a better profile if you decide to apply for a business loan.
- Your salary is a non-negotiable business expense. Resist the temptation to pay yourself lavishly by keeping the calculation simple: your documented living expenses + your estimated lifestyle expenditures. Camino has come up with some suggestions on how you can accurately name your own price.
Five ways to reinvest your profits wisely
1. Sock some away for a rainy day
A rainy-day fund is exactly what it sounds like: cash that is immediately available to address any number of unforeseen business blips, including a short-term cash-flow squeeze. While a loan from your Uncle Larry or a low-interest business loan may seem like sound alternatives, remember that you don’t need to apply for access to your own reserve fund. And you definitely won’t have to listen to any unsolicited advice before spending it. Don’t know what to include in your rainy-day fund calculations? Inc.com has come up with a list of sound options.
2. Invest in your marketing
If you have a great product, a great marketing program should be near the top of your reinvestment options. It will allow you to solidify the loyalty of your current customers and expand your reach to new ones. All of this increases your potential profit.
The best place to begin may be social media, where your company’s brand can gain insights on market trends and catch fire with new potential customers using paid ads, promoted posts, or paid influencers. Hootsuite has put together a great primer that can help you evaluate the possibilities for your business.
If you are overwhelmed by the possibilities, consider hiring a marketing consultant to develop the right mixture of strategies for your budget. Not convinced it’s worth it? Webstrategies estimates that the ROI for a good marketing effort can be 5:1 – or higher.
3. Invest in your employees
As your company grows, investing in personnel can have a ripple effect on performance. New employees have an obvious impact on productivity - more hands make light work. But they can also lessen burn-out among your veteran colleagues – the men and women who helped you realize some measure of success.
You may decide to offload some of the less popular or noncritical tasks to independent contractors. Or you may decide to increase your permanent hires. Whatever your staffing decision, remember that happy employees are likely to reduce the long-term costs of turnover.
Employee training or continuing education benefits can also boost morale. But their impact does not end there. Rapid growth may have forced some of your employees to take on customer-facing roles for which they felt ill-prepared. A well-designed workshop, seminar, or training course could give them the confidence and skills to shine in these new roles. Forego this investment, and poor customer experiences could easily morph into viral rants that will hurt even your best marketing efforts.
Remember that you, too, are an employee. A wise investment in your own skill development can help your business thrive. Consider hiring a professional coach or taking a course that will help you develop your own leadership strategy. Can’t spare the time out of the office? Harvard, Cornell, and even Disney offer online leadership courses you can attend from your desk.
4. Invest in your infrastructure
Is it time to upgrade your equipment, expand your workspace, or invest in new software? The answer will differ for every business, but the main question is: will it improve the efficiency of your operations and/or your customers’ experience? With your business plan in mind, ask yourself whether infrastructure deficiencies are presenting hurdles to your business’s long-term goals. If they are, then budgeting some of your profits to address those problems is a must.
Is that ancient e-commerce site crashing before customers can complete their orders? Are your employees leaving because cramped quarters make it impossible for them to complete their sales calls? Are the dryers in your laundromat causing your electric bills to spike without delivering drier bathmats to your customers?
If your robust profits make these logistical investments seem unnecessary, remember: your competitors are constantly looking to exploit your shortcomings. If a delivery glitch goes viral, or a competitor snaps up that spacious office complex you overlooked, you could lose some of the advantage you worked so hard to achieve.
5. Invest in an expedited debt retirement
Timely loan repayment will help maintain your business’s credit. And keeping your debt load in check will strengthen your foundation. But will early repayment of a business loan give you any benefit? The answer is different for each business, but one consideration applies to all financial decisions: will it save or cost your business dollars or time?
You should know whether your loan carries a penalty for early repayment. If so, does that penalty wipe out the savings you would reap from not making future interest payments? And would sinking a large chunk of cash into an early repayment prevent you from making business investments that would have a larger ROI?
Your best guidance will come from your own business plan, a document that maps out your options over the long run. But you can get some great insight from Biz2Credit’s analysis of this option.
Don’t forget to insure your investments
Hiscox understands that it’s the power of your dreams that will allow your business to expand. That’s why, for more than a century, we’ve been minimizing the risks faced by small and growing businesses. Our professional liability and general liability insurance can give you the confidence you need to keep dreaming. It could be the best investment you make.