Making a profit is the obvious goal of any business. But what should you do with those profits once you’ve made them? Two immediate answers spring to mind: save or spend. There is a third option, however, which involves keeping your money moving while making sure that it’s working for you. That option is investment, either in your company or outside of it.
The importance of growth
Before we get too carried away, it should be said that turning a profit in the first place is the immediate aim of any business. You need to be sure that your start-up is profitable before you start thinking about growth and expansion. Just because you turned a profit in your first month doesn’t mean that you’re ready to go on to bigger and better things. You need to be certain that profitability is sustainable in the long term before you start to look seriously at growth and reinvestment.
Nevertheless, once you move beyond the start-up phase, growing your company should be your primary aim, and reinvesting at least some of your profits may be the most effective way to achieve this. The first step is to consider your long-term goals. This should form part of your basic business plan. What do you hope to achieve, and what do you require in order to do this? What are the obstacles in your way? What could help your company to do better in the short term, and what would facilitate more long-term growth?
Reinvesting outside your company
There are also advantages to reinvesting an amount of your profits outside of your own company. You could look at this as a kind of insurance policy in case of a serious slump. One possibility is buying stock in a company operating in a completely different sector from your own. This means that you’re not supporting any of your rivals and also that you’re putting some of your profits in a place where they won’t be affected if your whole area of business experiences a downturn. This, after all, is something that can’t be planned for. You may make the best walking sticks in the world, but if they suddenly go out of fashion or become obsolete, you risk going under along with all of your less distinguished competitors.
An alternative to investing in other companies is to buy tangible assets or speculate on currency prices. Many big companies have whole investment arms dedicated to doing just this. It’s essential to keep up to date with the latest investment news in order to make sure that your money is working for you as effectively as possible.
Paths to growth
Even if you chose this investment route, the hope is that it will actually lead to further profits, which at some point you can put back into your own business. The question then remains, what form of investment is most worthwhile? To some extent, this is a question that only you can answer. New or better equipment and vehicles are obvious possibilities, as is moving to larger premises. You may also want to take on more staff, or hire experts in certain areas that will help you to move forward.
New training for existing staff and even the management is also a sound investment. Investing in yourself should be seen as good for the business, as there are always new skills that you can learn that will help you progress and develop as an entrepreneur. Other possibilities could include expanding your marketing and advertising budget, upgrading your website, or improving the quality of your product. Research and development, whereby excess profit is used on coming up with new lines, is also an excellent idea.
Look after the basics
Of course, you should only reinvest from your net profits, which means that you will have taken care of your day-to-day overheads and operating costs first. You should also put a certain amount aside for future taxes, typically 25-30% of your net profit. Remember though that any money reinvested in your own business is tax-free.
It’s also important that your reinvestment program includes keeping a contingency fund for emergency liquidity and cash flow. This is also known as retained earnings and can be seen as reinvestment waiting to happen. Remember to pay yourself a living wage – enough to look after your family and pay the mortgage as well as everything else.
Reinvestment is a sound alternative to taking out loans or selling equity, one that allows you to retain more control over your company while still allowing it to grow and expand. Where money in the bank often loses value in real terms, reinvestment keeps your profits working for you.
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