To enhance your investment, discover how much to consider reinvesting in your small business.
Reaching profitability as a small business owner is no small achievement. You likely overcame a lot of startup hurdles to get there, from finding the starting capital to figuring out what works for your market. The next step is finding the right balance between paying yourself as an owner and investing in areas that fuel your business growth and success.
The question is: how much do you reinvest?
The answer is different for every business owner. Traditionally, experts recommend that you invest at least 20% to 30% of your profits back into your company. But that percentage may change depending on multiple factors, including your timeline, goals for growth and your personal financial needs.
Beyond committing a percentage, it’s essential to understand what you want to achieve with your business and the funds required to get there. Crack that code and you’ll ensure that the money you pour back into business pays off in exponential ways.
Deciding How Much to Reinvest
You needed funds to get your business started. And, of course, there are operating expenses and overhead costs that keep it going. By reinvesting profits, however, you can drive growth and increase revenue. As noted, conventional wisdom suggests reinvesting 20% to 30%—some recommend up to even 50%—of profit back into your business.
To understand exactly how much you should dedicate to reinvestment, start by crafting your near- and long-term goals. For instance, perhaps you want to invest in software that automates some of your back-office functions. That way, your staff has more time to focus on customers.
Determine the cost of achieving these goals and how reinvesting your profits can help achieve them faster. Also, prioritize reinvestment initiatives that drive more revenue. For instance, a loan may make more sense for capital improvement projects. Meanwhile, you may want to invest heavily in staffing up to ensure your company can manage its growth or put profit back towards technology or sales efforts that add efficiencies and contribute to that growth.
Keep in mind: the amount you reinvest may change year to year, depending on your business aims and immediate needs.
Smart Ways to Reinvest
Even as you focus your reinvestment on opportunities for growth, there are still plenty of other areas that merit your attention. Some key ways that business owners reinvest their profits include:
- Investing in people. You need more employees to help your business grow, and often you need the employees before the growth occurs. For these reasons, funneling profits back into talent can be a smart move. Consider the roles that you need the most—and the ones that could really make a difference in your company’s future. For instance, perhaps an experienced salesperson in your vertical will enable you to close more deals. Or maybe you finally need a CFO who can create a detailed, long-term financial strategy. Your profits may also go toward creating a better culture and improving employee talent recruitment. Increasing salaries, adding benefits and enhancing workspaces can help your company retain the talent it has and find the best new hires.
- Improving technology. The efficiencies and insights provided by technology can truly take your business to the next level, from customer relationship management (CRM) applications that enable your sales teams to intelligently manage their leads to mobile-friendly e-commerce sites that allow your customers to easily order online. For many small businesses, technology upgrades may be long overdue. Prioritize updating outdated technology that may actually be costing your business money and your staff time. Then, work with your team to explore applications that can help scale your business, provide data about your customers that help you serve them better, or add efficiencies that ultimately save you money.
- Ramping up sales and marketing. Expanding your sales and marketing resources is a surefire way to generate more growth. Depending on your business, improving your online presence can often yield real results. Consider hiring contractors who specialize in search engine optimization (SEO), digital and content marketing to expand your online audience. Often even a small investment in digital marketing can yield big results in terms of additional sales leads. Utilizing advertising in other channels is another smart investment. Consider leveraging profits to sponsor industry events and place advertisements in relevant publications. Done right, the added exposure may generate new prospects that ultimately help the advertising pay for itself.
- Acquiring new capabilities or competitors. Companies acquire other businesses for multiple reasons—to expand their capabilities, grow into a new market or even neutralize a competitor by merging together. It’s not uncommon for businesses to dedicate their reinvestment dollars to purchasing another company. To be sure, merger and acquisition (M&A) activity requires significant funds: You'll need to dedicate a budget to fund the deal, as well as the team and processes that make the deal happen. Even so, a targeted acquisition can speed up your own business goals and rapidly increase the size, capacity and growth of your organization in the process.
Reaching profitability is an exciting milestone and one that opens up the opportunity to do even more with your business. Reinvest in smart ways, and you'll accelerate your business growth and generate even more profit as a result.