Should You Reinvest Profits Into Your Business?

Why Would Business Owners Choose to Reinvest Profits?

Delayed gratification. Putting in effort when you know you might not see a return on it until further down the road takes. And patience is something we could all use a little more of, especially when it comes to our work. It’s natural to want to enjoy the fruits of your labor the second you harvest them.

It’s exciting when your small business starts turning a noticeable profit! But be sure to think about the best way to spend that extra capital. Reinvesting profits back into your business can help set your small business up for success, and even help it to grow. We’re going to discuss the pros and cons of reinvesting your profits, as well as some of the best ways to reinvest them.

The Advantages and Disadvantages of Business Reinvestment

When your small business is running in the black, it could mean it’s time to start using those profits to help your business grow. But is reinvesting a good idea? It depends. There are pros and cons for everything, including how to spend your profits.

The pros of reinvesting in your business.

The main benefit to reinvesting profits is simple: It can help improve the business. If business is booming, you could use those profits to support expansion to accommodate an increase in anticipated volume. These improvements might include:

• New or improved equipment
• Moving to a larger location or opening a second one
• Hiring additional staff

Also, if the business isn’t your primary source of income and you don’t rely on those profits to support you and your family, reinvesting may be a good idea depending on your aspirations for the business. The thought process is that instead of taking a small payout now, you can use that money to grow your business with the hopes of getting a bigger payout later.

The cons of reinvesting profits back into your business.

No risk, no reward. You’ve probably heard this phrase thrown around before. Typically, it’s meant to encourage people to venture out of the safe zone in the hopes it will pay off. But it’s important to remember that it’s not always a good idea to take a risk.

Reinvesting profits is taking a risk and there is no guarantee you’ll see a return on your investment or not. No matter how intimately you know your business, understand its industry, and research the current marketplace, there’s no surefire way to predict how a financial venture will play out. Without warning, you could be faced with challenges such as:

• Rising costs
• Decreasing demand
• An economic downturn or recession

There’s also the emotional investment to consider. You may find yourself wanting to update your operation with high-end — and high-price-point — equipment or invest in costly renovations. It’s natural. You want only the best so your small business can be the best. But the costs of these upgrades may end up outweighing their benefits. It can be disappointing to put a large financial stake into your business only to have it hurt more than it helps.

How Much Money Should You Reinvest in Your Business?

The amount of money you should reinvest into your small business is, ultimately, your decision. There’s not a “one size fits all” number or percentage that’s going to be right for everyone. However, reinvesting 100% of your profits may not be wise. When calculating how much you want to reinvest, here are some factors to consider:

• Your debts and regular expenses
• How much you typically pay in taxes
• How much of a profit you’re earning regularly
• How much you rely on business profits for your personal expenses

As always, when in doubt, don’t hesitate to seek financial advice from a professional to get their expert advice on whether reinvesting profits is a good idea, and if so, what a reasonable amount would be.

Where to Reinvest Your Profits

If you’ve decided that reinvesting profits back into your business is the right choice, next comes the question: Where should I focus the reinvestments? There are plenty of options, and the right choice will generally depend on what type of business it is and how much you’re looking to put back into it. Read on for reinvestment strategies that could be worth considering.

Hardware and equipment.

No matter what industry your small business is in, you know the importance of having the right tools and equipment to get the job done. For a restaurateur, that could mean new cookware. For a graphic designer, that might mean a new top-of-the-line computer. For contractors, it might mean high-quality power tools and heavy machinery.

Whatever the tools of your trade happen to be, reinvesting your profits into updating or replacing those tools can be a great opportunity to improve your workflow. It’s important, however, to carefully weigh your options. First, for big-ticket items, consider if they’re worth buying outright or if leasing or financing is a better strategy for your business model.

Second, make sure the upgrades you’re making are of good value. Don’t upgrade just for the sake of having the newest model. Your investments should be for hardware and equipment that are likely to last a long time, improve your work, streamline processes for employees, and make your small business more efficient and a good place to work overall.

Software and automation.

Running your own business often means you have a lot on your plate. Sometimes there just aren’t enough hours in the day for everything you need to do. Reinvesting profits into the right software can help. Certain POS (point-of-sale) or billing systems can help you manage automatic payments and streamline invoicing.

Reinvesting profits into software enhancements could also include bookkeeping applications, newsletter automation, or customer management database systems. Every small business has unique needs. Take a close look at how your business is running, and try to identify any pain points that new software could improve those points.

Employee culture and development.

Small business owners with employees generally know how important it is to ensure their employees’ work experience is a positive one. You don’t want to lose good employees because your business is stuck in the past or there was a miscommunication about expectations.

There are a few ways to not only help keep your employees on board, but also to help them grow and nurture their skills. In recent years, flexibility has become important for many workers in certain industries. As a result, you might consider ways that you can incorporate flexibility into your employees’ benefits. Obviously, this won’t apply to every business as not every industry can operate fully remote. However, asking your employees what flexibility would mean for them could help you find ways to improve their overall experience.

You also might consider expanding your benefits package. Check out our guide to small business health insurance.

Reinvesting in your employees could also mean expanding your team with new hires to help with increasing demand. For your seasoned employees, consider their skills. Could they be taking on more responsibilities? If so, it might be time to create new roles. Upward mobility in the workplace can be a great way to incentivize employees to stay and continue growing with you and the company.

Advertising.

You know how to do your job well. You know how to run your business. But for many small business owners, marketing can feel like uncharted territory. Knowing how to advertise your goods and services is a whole different ball game. This requires a little know-how, and likely some financial investment.

There are a few different avenues to explore when reinvesting your profits into your marketing budget. There’s the traditional route, with ads in the newspaper, as well as radio and TV spots. You also can pay for sponsored social media posts and Google ads. You can hire a marketing professional to help guide you through your options. Even hiring a web designer or SEO (search engine optimization) strategist to update your website could increase visibility for your business!

Materials and ingredients.

Small businesses focused on providing products and other tangible goods know the importance of quality control. The quality of the goods you provide can set you apart from competitors. Maybe you think the current manufacturer of your product isn’t quite up to snuff and you want to switch to another one. Do you dream of switching to exclusively natural wool for your knitting and crocheting business? Or perhaps you wish you could exclusively use Irish butter at your bakery.

If you think your products could be improved with higher-quality materials, that might be a rich area for profit reinvestment. Customers appreciate when they know you hold your products to their highest standards.

Nest egg.

This may seem counterintuitive, since it doesn’t actually involve spending the money you’ve earned. Putting your profits into a savings account, however, is still a valid and useful way to reinvest in your small business. By doing so, you’re helping to prepare your business for the long haul. Having a dedicated savings fund helps ensure that you have a safety net if the unexpected happens. This could include:

• Rent increases
• Fees and fines
• Taxes
• Rising prices on materials
• Cash-flow interruptions

But your savings don’t have to be used for emergencies. Having cash on hand can be a boon when a great opportunity comes knocking. You may want to jump on getting a great rate on new furnishings or products. If the chance arises, you could even buy out a competitor.

Community involvement.

OK, so this one isn’t technically reinvesting directly back into your small business. However, investing time and money into getting involved in your community has the potential to pay off in dividends.

It helps you to network with other businesses in the area. Building these peer relationships helps you to share ideas, get referrals, and receive feedback and advice to help both parties grow. Community involvement can also increase your visibility. Name recognition can be a huge part of bringing in new clients or customers.

So don’t overlook getting involved. Keep an eye out for opportunities. Does the neighborhood throw a block party? Is there a farmers or artisans market you could apply for? You could host a public clean-up event, or throw an open house to draw in new clientele. Even sponsoring a local little league team could help put your business out there. While investing directly into your business is crucial for growth, investing in your community helps boost your public profile and could mean increased business down the road.

Protecting Your Investment with Insurance

When your small business starts turning a good profit, that’s cause for celebration. Seeing your hard work and dedication pay off is a monumental moment for any business owner. It makes all the long hours and stress worth it. So why not protect all that hard work?

Small business insurance can help keep your business flourishing. Even a profitable business can face financial hardship following a costly claim. Don’t let the unexpected set your small business back. Simply Business® offers a wide range of commercial insurance coverage. We can help you find affordable and personalized insurance options from leading national carriers in just minutes.

Using our free online quote tool, tell us a little about your business and insurance needs. We’ll have a quote ready in minutes. It’s business insurance, made simple.

Invest for Success

Reinvesting profits into your small business may not come with a quick payoff. When you put money back into your business, it’s important to not expect a rapid return on your investment. When you invest in your business, the primary goal is typically to support its long-term growth and development. Don’t be discouraged if you don’t see increased profits right out of the gate.

By reinvesting your profits, you’re betting on your small business’s success. You do it because you believe your business has something to offer and that investing may help improve its resilience and longevity, while also helping to facilitate its growth. Reinvestment is playing the long game. Watching your small business blossom down the road will be worth the wait.