If a business is going to grow, it requires additional investments. These can range from buying new office equipment, which will increase the speed and quality of work, additional training, which will help employees tackle more complex tasks, or marketing, which will allow the business to attract more clients. Of course, funding such investments will require money, and if your business is up and running, the easiest way to get this money is from your own profits.
But how much money is it sensible to put back into your business? And once a reinvestment budget has been established, what is the best use for any surplus cash?
Firstly, let’s take a look at the issue of how much you should be reinvesting. As you’ll see, unfortunately, there’s no easy answer.
How Much Should You Reinvest?
Everybody has a different opinion on what a reinvestment budget should look like. Some people suggest reinvesting 10% of your profits back into the company. Others suggest closer to 50%.
The fact that recommendations vary so wildly suggests that an arbitrary figure is unlikely to fit the bill. You need to consider the unique qualities of your business and come to your own conclusions.
Here are a few things to consider:
Business and Personal Objectives
Firstly, you should be clear with yourself about your business objectives and vision. How much you choose to reinvest back into your business will depend on where you see your business going.
- Where are you up to in your business journey? Are you just starting out or have you been around for years?
- Do you have dreams of selling your business one day? Would you like your business to compete with leading brands within your industry?
- Did you start your business as a way to fulfill your passion? Or a way to work a little less as you approach retirement or juggle caring commitments?
Why are these questions important? A newly formed business will probably need a high proportion of reinvestment if it is to realise its full potential. A well-established company, on the other hand, may be able to get away with reinvesting less.
Equally, someone who is happy with their business ticking over and creating a modest income will need to reinvest less than someone who has big ambitions for the future of their enterprise.
Your Business Accounts
How much money you reinvest will depend upon how much money you have coming in. Take a close look at business finances. What is your gross income?
Then consider what business costs, such as rent, utilities, employees, and taxes, you need deduct from this income.
You should also look at your cash flow situation. What money do you need to have on hand each month?
With all of these figures clear in your head, you can see how much money is available for you to reinvest. However, don’t set things in stone.
Business fortunes ebb and flow. This means you may need to be flexible with whatever reinvestment percentage figure you arrive at, revisiting and recalculating year on year.
Any Burning Business Needs
The level of reinvestment you choose to make in a particular year might also be impacted by business needs.
It could be that a particular area of your business is preventing growth. Or that you need to make certain improvements to keep up with the competition.
If the business is in need, you might choose to take a smaller slice of the profits so the business can benefit in one of the following areas:
- Training and Development: Improving your skills and those of your team, so you can work more effectively.
- Marketing: Spreading the word about your brand, products and/or services with paid ads, content, a new website or attending networking events.
- Software or Equipment Update: Investing in your tech or equipment so you and the team can work faster and more productively.
- Employees: Taking on a new member of staff to expand your capabilities and lighten the workload.
- A Bigger Space: Investing in a bigger office or warehouse so you can employ more staff or maintain higher levels of stock.
- Launch a New Product or Service: Developing and bringing new products or services to market, to keep up with or overtake the competition.
All of the above have the aim of improving the quality of your offering for customers, working more productively and finding ways to increase sales.
Each and every one of these reinvestment opportunities has the potential to grow your business profits, leaving ever more cash for reinvestment as you move forward.
How to Use the Surplus?
If all your reinvestment needs are covered and you are receiving the personal income you want or need, you have the welcome task of deciding where to use the surplus income from your company.
Putting money into savings is one choice. But whilst your money is guaranteed, interest rates are rarely high enough to generate real revenue.
If you really want to make your money work for you, you should look to investments. This usually means some element of risk but much higher returns.
Find the right investments and you’ll develop a passive stream of income that will boost company profits and create an even bigger surplus over the coming years.
Ways to Invest Surplus Business Profits
Stocks and shares. Bonds. Real estate. There are a few routes you can go down when it comes to making business investments.
But how will you actually research and make these investments?
You could enlist the services of a financial advisor to pursue your business investments. Just do thorough due diligence into any financial advisors you are considering. You should be able to completely trust that they have your best business interests at heart.
Alternatively, you could go it alone. With the help of investing courses and your own research, you could gather the knowledge you need to make informed investment choices.
Making decisions about business reinvestment and investment can feel like a challenge. But don’t lose sight of what it means to be in this position.
Your business has become successful enough to generate an income (and possibly a surplus). Take this moment to pat yourself on the back before delving into the investment decision making process.
About the author:
Sienna Walker is a business and self-improvement blogger who previously worked as a tutor. She values education, self-improvement, and learning, and often writes about things connected to growing a successful business. Feel free to reach out to her at @SiennaWalkerS and leave a nice comment.