How to successfully reinvest your business profits
Running your own business takes a lot of hard work and planning. Of course, the aim of any business is to make a profit, and just reaching that point is a triumph for any entrepreneur. If you’re consistently making a profit, day in, day out, then it’s fair to say that your business is a success.
This isn’t a moment to rest on your laurels, however. Once you’re making a profit, the next question is what do you do with it? To some degree, this depends on how your business is set up— whether you’re a sole trader, or involved in a partnership, whether you’re running a cooperative or a limited company with shareholders. Essentially there are three basic options: distribute the profit to the owners and/or stakeholders, keep the money in a business account, or reinvest it.
If you’ve not been in business for long, then it may be a good idea to get financial advice at this stage. While those involved in the business are certainly entitled to make a personal profit, and it’s also a good idea to keep funds in your account against future expenses, you should always try to reinvest at least some of your profits whenever possible.
If the money is reinvested, it will work to make you more money, whereas money declared as profit will be taxable. When you reinvest, you can either put the money back into your own business or invest it elsewhere in the hope of getting a decent return.
Investing outside your own business
Putting your own business profits into someone else’s business might seem like an odd idea, but if it’s done right, then it can have definite advantages. Any business is vulnerable to the vagaries of the market, and all kinds of social, economic, political and even geophysical pressures that we have no control over. These factors can cause a downturn in your business even if you’re making a market-leading product and following the best practices every step of the way.
Don’t invest in a company operating in the same sector as you are, unless you’re planning to buy them out, as this would be supporting a rival firm. Instead, invest in a completely different sector to your own, so if there is an industry-wide crisis that impacts your business, your investments in another industry will tide you over until things level out again.
Investing in currency
As well as using your profits to buy stocks and shares in a different company, investing in currencies can be a good way to make your money go further. The foreign exchange market can be very profitable if you can dedicate the time and energy to making it work for you.
There are many ways to reinvest in your own business, above and beyond the money you need to spend on running costs and fixed overheads. Reinvesting can help your business to grow and expand, which is essential if your success is going to be sustainable. Even if you’re making a regular profit now, no business can afford to stand still, so it’s important to always look for ways you can expand or move into new areas.
Ideas for reinvestment along these lines might include buying or renting bigger premises; taking on new staff; buying a company car or van; or updating your office equipment, such as buying a new desktop computer. At some stage, you might want to consider buying out a rival company, as mentioned earlier. You can also plough some of your profits into research and development, such as creating and testing prototypes of new products, or seeking out new talent.
Ideally, you should be putting a good 50% of your profits back into your own business, while also maintaining a healthy bank balance of available cash and an emergency fund for unexpected crises. In addition, investing some of your profits outside of your core business area is also a good idea, if only as a safeguard against a sector-wide downturn. Sometimes your outside investments may turn into a healthy income stream in their own right.
If you’re turning a profit on a regular basis then your business is already a success. What you choose to do next could turn a modest success into a great one.