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Turning a profit: how to reinvest business funds

A large number of businesses can take a while to break even, let alone make a profit. However, when the profits start rolling in, it can be tricky to know what to do with those funds. Should you save the money for a rainy day? Give yourself a pay bump? Or, should you get on the front foot and start making serious investments? This article explores this third option. Smart reinvestment of business funds could be the deciding factor on whether your business succeeds, stumbles or shuts its doors.

Calculating profit

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.

Why should I reinvest my profits?

“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.

At what point should I reinvest my profits?

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.

How to analyse where to invest?

In all honesty, you won’t know the best areas to reinvest in until you begin, and then analyse the results. There’s no one size fits all when it comes to the perfect reinvestment recipe. All businesses are different and what might prove lucrative for some, might flop for others. Keep testing and analysing the results against your business goals. Don’t be too hasty - do your research, give trials time to bed in and allow time for reinvestments to prove their worth before assessing any success.

  • Step 1: Understand your business goals

    The best starting point. Take a step back and reflect on your business goals for the next 1-3 years. You need to have clear goals in place before analysing areas for reinvestment. For example, do you want to:

    • Increase revenue?
    • Expand your team?
    • Launch a new service or product?
    • Improve in-house skills?
    • Invest in new equipment, new technology?
    • Utilise business data more effectively to steer strategy?
    • Streamline processes to inject efficiencies, saving time and money?
    • Increase brand awareness and loyalty amongst your target market?
    • A mix of the above?
  • Step 2: What needs to change?

    With business goals in place, assess what changes need to be made to meet them, for example:

    • Not enough clients/orders
    • Too many tasks, not enough time
    • Tasks are taking too long and involving too many people
    • Poor communication between staff/clients
    • Brand unknown
    • Lack of clarity around target market/marketing strategy
    • Services/products could be improved
    • Concerns around security and compliance e.g. client data storage
  • Step 3: Make an investment list

    Now you’ve worked out what needs changing to meet your goals, research solutions for each area, including approximate costs. 

    For example, Customer Relationship Management (CRM) software solves a number of business pain points such as improving communication and clarity across teams and with clients. It helps to streamline processes to increase efficiency, while offering a platform to better view and analyse data. If these are some of your pain points, research how much it would cost to enable a CRM across your business and the associated timescales. 

    Top tip: Keep your long term strategy in mind too – areas that might not be a frustration right now, might become one. Ensure solutions you reinvest in have the ability to grow with your business. For example, CRMs have features that make your sales pipeline more transparent across the business, have in-built social media scheduling tools – all great features for when your team and client base expand as your company grows.

  • Step 4: Make a timeline

    Refine your investment list by placing tasks in order of urgency, with the understanding that some might need to occur before others can. Be realistic with timings – give wriggle room for research, testing and analysis as part of the reinvestment process.

  • Step 5: Profit allocation table

    Transfer into a profit allocation table. Outline what, when (e.g. in the next 6 months?), the total cost of the investment and whether it’s an ongoing cost that is covered in monthly payments, or a one-off cost that is paid in one go.

  • Step 6: Don’t forget to keep ROI in mind

    Keep return on investment at the forefront of all activity. Consider how long it will take to see results. For example, if you have a limited budget and are trying to increase brand awareness / revenue, consider starting with social media and Pay Per Click (PPC) advertising to gain instant exposure, before investing in longer term SEO strategies that take time to build.

What are the best areas to reinvest in?

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.

How do I make my money work harder?

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.

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