It takes time to establish and grow your business. But once you’re able to compensate current employees, maintain equipment and pay rent comfortably, it’s time to consider putting extra money into your business.
What is reinvestment?
Reinvestment means pouring a percentage of your company's profits back into your business. It's a great way to increase the value of your business and to help your business grow.
Reinvesting is worth it
Reinvesting profits into your business carries many potential benefits:
Your company can grow. From successfully reinvesting, you'll increase your customer base and, in turn, profits that you can use to keep building your business. Plus, shareholders will see that your company is in growth mode. Over the long run, growth in business size and profit potential increase the value of shares (or the value of having an ownership role and financial stake in the business).
There are tax benefits. Reinvested money is a business expense, so you won’t have to pay income taxes on it.
You'll learn new things (such as what percentage of profits should be reinvested in your business). You may not get it right the first time, but that's OK. You're still learning, and there’s power in that process because it allows you to come back stronger.
When investing in different areas in your business, you can ensure all your eggs aren't in one basket. For example, if you're a headgear company that normally invests in baseball caps, consider investing in winter caps, too. That way, if baseball cap sales decline, you'll have other revenue streams to fall back on.
Investing options for your business
While it's certainly important to invest in your business, where should you focus your funds? Here are some options to consider:
An investment portfolio: Include investments, such as stocks, bonds, mutual funds, etc. For many business owners, reinvesting means putting together a portfolio of stocks. Stocks return around 7% over the long run, while bonds provide a 4% return and carry less risk.
Yourself: Try courses, books, and videos to expand your knowledge and skill set.
Conferences or networking opportunities: Make connections with potential clients or business partners.
Business expansion: Open another store, get better technology, acquire a business or start a new one.
Business improvements: Build infrastructure, improve manufacturing time or invest more in customer support.
A cushion: Have cash in case of unforeseen expenses or situations.
More marketing: Consider hiring a marketing person or agency to create buzz and generate income through things such as improved search rankings and greater relationships with customers.
Your employees: Hire more if you need them, or work on training and boosting the morale of existing employees.
Hire someone: Balance the cost of hiring someone new, delegating an employee to reinvest for you or doing it yourself.
Note that these options can work for any industry, but results may vary. For example, investing in customer service training could drastically improve sales for a retail store while not impacting an online store. Also keep in mind that, if you change too much about your business, your brand may need a refresh to stay relevant.
When deciding which ventures are worth your time and money, consider your return on investment (ROI) so you know how much something new will help your business monetarily. There is a viable investment option for any and all businesses, but remember that some changes can’t be seen in numbers.
Going for gold: How much to reinvest
First, consider where you’ll get the best return on your money and what your business goals are. Think about why you started your business and where you want it to go in the future. Do you want to work fewer hours, hire more employees or make more money? Answering these questions can help you determine how much to invest. If you just want to pay the bills, for example, aggressive reinvestment may not be necessary.
But keep in mind, there's no hard-and-fast rule for reinvesting. My Work From Home Money suggests reinvesting a third of your profits while remembering that money spent on personal purchases is money that can’t be used to better your business. Whatever you can invest now, do it — whether it's thousands of dollars or $10.
On the other hand, Forbes suggests reinvesting based on strategy instead of a set amount or percentage. Each area of your business needs money, but you need to balance your investments so you don’t lean too heavily in one area and leave another behind. If you choose not to reinvest, your returns will be the same every year.
Whatever your reinvestment approach, be sure to maintain cash flow to cover current commitments and new growth opportunities.