Should You Reinvest Profits Back Into Your Business?

As a small business owner, seeing your business turning a noticeable profit is exciting. Every dollar earned through your hard work is valuable. While it may be wise to reinvest capital into your business, it’s also helpful to know when the time is right.

Companies that reinvest their profits into their business help set the stage for success and even help it grow. Whether it’s hiring additional staff or investing in newer technology, small business owners often have one question when it comes to profits: Should I reinvest capital into my business?

When deciding what to do with your business profits, there are many factors to consider. In this article, we’ll discuss reinvestment risk, the pros and cons of reinvesting profits, as well as a way to protect profits that a company reinvests.

The Advantages and Disadvantages of Reinvesting Profits

When your small business is running in the black, it could mean it’s time to reinvest capital 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.

Before we explore the pros and cons, let’s answer this question: At what stage of growth is a business profitable?

It may come as no surprise that most new businesses are not profitable overnight. Business growth happens in stages, and your small business may have its own set of goals and challenges in each phase. It’s important to know the difference between a growing company and one that is profitable before you make any decisions to reinvest capital.

The pros of reinvesting in your business.

For companies that reinvest their profits, the benefit 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, it may be a good idea to reinvest capital based 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, hoping you’ll get a bigger payout later.

The cons of reinvesting profits back into business.

No risk, no reward. You’ve probably heard that phrase thrown around before. Typically, it’s meant to encourage people to venture out of their safe zone in the hopes it will pay off. But it’s important to remember that a level of reinvestment risk is involved.

When you reinvest capital, there is no guarantee you’ll see a return on your investment. No matter how intimately you know your business, understand its industry, and research the current marketplace, there’s no surefire way to predict whether a financial venture will play out or not. 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 reinvest capital in costly renovations. It’s natural. You want only the best so your small business can be the best. However, there’s always the reinvestment risk that the cost of upgrades will outweigh the benefits. It’s disappointing to invest a large financial stake into your business only to have it hurt more than it helps.

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 just minutes. It’s business insurance made simple.

The Right Time to Reinvest

Ultimately, the decision to reinvest capital or not, comes down to making the right investments at the right time. You want to ensure that you’re investing enough to promote growth and gain benefits but not so much that you’re putting your business in financial jeopardy.

Companies that reinvest profits are focused on long-term success, which is never a bad thing. However, it’s important for small business owners to be aware of reinvestment risk and the potential drawbacks of investing profits.

When the time is right for your business to reinvest capital, you’ll need to know where to put your money. Our companion article: “How and Where to Reinvest Your Profits” walks you through the process and your options. When you’re armed with information and financial strategies, it’s easier to make smart and sound investment decisions for your small business.