Turning a profit: how to reinvest business funds

With money going in and out of a business, it is not always easy to see whether it’s making money. Calculating profit helps give some clarity. You need to know what figures you’re working with before you can consider any reinvestment. 

Calculating profit for one item is a simple formula: profit = price – cost. However, calculating profit for a high quantity of items involves deducting direct costs such as materials and labour, and indirect costs (also known as overheads) from sales. Under normal accounting rules, sales and expenses are included in profit when they occur, not when they are actually paid, so profit will include credit sales and purchases even when they are yet to be paid. 

Once your business is making a profit and this figure is identified, reinvesting business funds can help you reach your business goals sooner than you might have thought, whether you’re wanting to:

• Expand and grow 
• Attract more investment  
• Employ more staff
• All of the above!

Remember: Profit is different to cash. Some things will affect the cash flow of the business, but won’t affect profit e.g. money taken out of the business for personal use. Likewise, some items will affect profit but will not affect cash such as provisions e.g. where a business makes an adjustment for a customer not paying.

“You’ve got to spend money to make money” － a popular quote for good reason. While you don’t need to plough all profits back into your business, wisely reinvesting earnings can help bring you closer to your business goals. Here are some of the benefits:

• Help your company grow
  Not only will successful reinvestments increase your customer base / profits, but as business momentum builds, so does its appeal to investors.
• Attract investment
  Putting profit back into your business also shows potential investors that you have confidence in the success of your company, further increasing its appeal.
• Maintain control
  Alternatively, if you want to stay in the driving seat, reinvesting profits rather than seeking external equity avoids diluting your ownership and control rights of your business.
• Tax benefits
  Reinvested money is considered a business expense, so you won’t need to pay income tax on it. (Always speak to an accountant or financial advisor on tax advice and cost effective recommendations on running your business.)
• Avoid debt
  As a small business owner, it can be a tough decision to reinvest profits back into your company when it’s the only source of income you have. But your business activities need funding and you can quickly find yourself in a chicken-and-egg stalemate. When growing a business there are two primary sources of funds: debt and equity. Debt usually comes from bank loans and other financial institutions, while equity can come from outside investment or from reinvesting profits. By opting for reinvesting profits to fund your business expansion, you avoid taking on excess debt and corresponding interest payments that could prove problematic down the line.
• Learn what works
  Discover what reinvestments work in growing your business and do more of them! Never stop learning – what might work now, could change in the future. For example, stay ahead of the curve with new marketing platforms and techniques, experiment with more sustainable materials, try a new way of delivering your services more efficiently. Test, refine and maintain agility to be truly successful long term.

Once you’ve calculated your profit and are clear on figures, you should begin thinking about reinvesting a portion of your profit to add fuel to your business growth engine. Smart reinvestment could significantly speed up the growth rate of your business, and attractiveness to investors. If you’re not sure of your financial position and where to reinvest first, it’s always worth considering bringing in the expertise of an accountant or financial advisor.

These will depend on a number of factors such as your available profit, business type, goals, target market, skills, etc. Some suggestions:

• Business improvements
  For example, developing your products/services, creating better processes, investing in customer service training, etc.
• Business expansion
  Expanding your team, product range, services. Enabling better technology, acquiring another business, etc.
• Marketing
  If your profit allows, consider employing an external marketing consultant to review what you’re saying where. Promote your business in the places where your target market is most active and transaction-minded. Selling online? Invest in an external/impartial website review, rating user experience, accessibility, SEO and messaging, as these could be impacting your visibility and conversion rates. Can you hire a marketing person, or expand your marketing team? Or if you can’t commit to a new team member right now, could you work with a marketing agency that specialises in your sector?
• You!
  Expand your knowledge and skill set via courses, books, etc.
• Staff
  Can you afford to expand your team to achieve more for your business? Or invest in training of existing staff? Could you encourage greater productivity and loyalty by providing regular team morale activities? Don’t forget about apprenticeships – they’re a cost effective way to recruit and train staff.
• Networking events/conferences
  Make connections with prospects and potential business partners. Get up-to-speed on which events have gone virtual, could there be sponsorship/speaking opportunities?
• Financial safety net
  Unexpected expenses or situations can arise. Make sure you have a financial cushion in place to safeguard your business.

As well as looking for reinvestment opportunities, you also need to analyse your business cost effectiveness. There’s only a limited amount of money you have to spend on your business. Being cost-effective is ensuring you are getting the maximum out of your available funds. It’s ensuring that you’re spending your budget on the right things with the aim to get the best value for money that you can. From staff to premises, equipment to suppliers, this article offers up some great starting points.

Ultimately, you as the business owner will have a good idea of whether your expenditure is cost-effective. But, regularly reviewing and analysing your costs as objectively as possible is good business practice. A great way to regularly monitor cost-effectiveness, is to download a budget tracker app.

While reinvesting profits can be a case of trial and error at first, there are smart ways to approach the process. Taking the above points into consideration will ensure you get off to the most efficient and cost effective start.