Of course, everyone generally starts a business with the goal of making a profit. And when that goal materializes, it is indeed a cause for a celebration. However, going off and spending that profit on a luxury vacation or some other such purchase, doesn't necessarily help your business. You're on a roll, you have momentum, now sustain that momentum by reinvesting in your company.
A sound reinvesting strategy is the best way to ensure your company's long-term survival. You need to think about the future, take a big picture approach--what goals and plans do you have for your business and what steps do you need to take to get there? So what exactly are some of the best ways to reinvest in order to maximize development…Below are some guidelines and ideas that you should consider as far as reinvestment practices go.
Where to Put Your Profits
There are actually a few different ways of reinvesting profits. It really does depend on a number of factors, including your growth stage, industry, and of course, your future plans play a big part in how you will reinvest your money.
These represent the most popular areas when it comes to profit allocation. Yes, you may not be able to take as much money "home" with you, but in the end, this will be the most productive strategy for your business.
Marketing
In some ways, nothing is more important for your business than a dynamic marketing plan. From more old school tactics to digital marketing, you need to advertise who you are, what you do and why you're valuable. Odds are, your competitors are most definitely investing and/or reinvesting in their marketing, you cannot afford to let them pass you by.
Fortunately, with the rise and ascendancy of digital marketing, the cost of advertising has come down significantly from the days when your options consisted solely of TV spots, radio, and billboards. Among areas in which you can reinvest your profits to help create a more solid marketing plan: SEO, affiliate marketing, website, social media marketing, influencer marketing, webinars, among other such channels.
New Employees
Human capital is the backbone of your business. Attracting new and bright talent can only make your organization that much stronger. Certainly, the staff you might currently have is probably dynamic, so with additional profits, why not invest in growing that strength by adding numbers to it.
Another avenue you might explore as far as reinvestment is to offer educational and training programs from time to time to keep your employees up to date and to foster their talent even further. By providing such opportunities you definitely give them a reason to stay motivated.
Capital Improvements
Many small business owners often opt to reinvest their profits into things like equipment, vehicles, building space and inventory—more tangible elements required to help their company succeed. In the long run, this will not only enable your business to expand but also up your quality level and thus your reputation. The more money your business makes, the more attention you want to pay to those improvements that really can make a significant difference from even just a day to day perspective.
Company Buyout
Depending on how much of a profit you're making, this may be a great option for reinvestment. Acquiring a smaller company or even a company's assets to help further develop your own portfolio could create a ton of opportunity for your business.
Take a look at Facebook for example, they were able to buy out Instagram and did very well in doing so. Not to say that your merger and/or acquisition would be on that level, but starting small and growing from there by purchasing one of your competitors is a very strategic move to make with your reinvestment dollars.
Have a Buffer
Putting some cash aside for that rainy day or slower business season is a great idea for reinvesting profits. Your startup capital will eventually run out and you may need some additional money depending on the situation that arises.
Having that critical backup fund will help prepare you for an emergency, and just, in general, provide greater peace of mind. Why might you need that cash buffer: if cash flow is becoming an issue, higher tax bills than expected so that you can take advantage of low prices, maybe you're even facing a rent increase.
This is still a reinvestment strategy; it is often referred to as retained earnings, as you are holding the money back for later use at a future date.
Pros and Cons When it Comes to Reinvesting
Almost always with reinvesting, the pros are going to prevail. Be it money for capital improvement, new hires, that rainy day nest egg or company training programs, you are taking steps to bolster your business and position it toward success. Also, keep in mind that by using profits for the aforementioned things you're avoiding loans and also investors. Loans for one might be high interest and with fees, can be costly. Whereas, taking on investors can be tricky especially when it comes to ownership and control of the company. This may effectively lessen the amount of control you have over your own business.
You do want to be careful not to start reinvesting profits too early on. If earnings aren't quite high enough, then you could ultimately be doing more harm than good. Not to mention, keep in mind that you have to live as well. Make sure you are financially secure before you start to reinvest your money.
The Smart Way to Go About Reinvesting
It is exciting when you start to make a profit, but that doesn't mean go crazy and start spending. If anything, this may be time to even tighten up a little more and keep those profits rolling in. Look to the future—think long term. The big picture should be your focus here, as opposed to immediate gratification.
Reinvestment equals opportunity. Whether, as mentioned, attracting more talent, making improvements to your space, getting new equipment, or starting to put away that nest egg, whatever strategy you employ, make it count. At First Union, our many loan products can help businesses with capital. Call today to find out!