As a small business owner, there’s nothing more satisfying than looking at your balance sheet and spotting a net profit. If you’re in this situation, it’s rather exclusive company as only 40% of American small businesses are actually profitable.
What you do with your profits will determine the future direction of your small business. Smart reinvestment could take your company to the moon, or it could see it take two steps backwards.
Let’s examine the main priority areas for reinvesting your small business’s profits.
Should You Pay Yourself First?
The main goal of any business owner is to make money and enjoy a higher standard of living. Paying yourself is an essential component of allocating your end-of-year profits. However, taking out too much can leave your organization stagnant.
In particular, many inexperienced entrepreneurs experience “lifestyle creep” whereby the more they make the more their living expenses rise.
Paying yourself is important but keep tabs on your living expenses and never pay yourself more than you need to enjoy your life.
1. Expand Your Business’s Infrastructure
Small businesses that turn a profit have often reached capacity. Upgrading your infrastructure for expansion could allow you to improve the customer experience, enhance efficiency, and take on greater levels of capacity.
For example, if a furniture store has a long customer waiting list, this is not a good thing. It means customers who don’t want to wait for that custom wardrobe will go elsewhere.
By expanding your business’s infrastructure, you can take on bigger and better projects, which means greater profits.
2. Upgrade Your Existing Equipment
Most entrepreneurs opt to bootstrap their business because they have no other choice. When starting, the chances are you’re purchasing older, used equipment to get your organization off the ground.
Unfortunately, older business equipment is often slower, performs to a lower standard, and breaks down more often. This can cause significant disruption and costs to spiral.
Take a restaurant kitchen as an example. If the old grill or deep fat frier breaks, how much money would that restaurant lose from the loss of custom and repair costs?
Reinvesting your profits by upgrading your existing equipment now can make your operations more efficient and more reliable.
3. Hire New Employees
Hiring new employees is a big step to take. Small businesses are often hesitant to make new hires, even when they need additional staff to handle increased workloads. Much of this is due to the hidden costs of hiring.
Companies spend an average of $4,000 to recruit, hire, and train new employees, with new hires taking an average of five months to reach full productivity.
However, the right hire could transform your business in anticipation of major growth periods. Reinvesting profits into new hires could be the best move you make.
4. Go Into Marketing
Marketing should make up the majority of your expenditure. The days of free, organic marketing are gone. Whether it’s on the street or social media, we live in a pay to play environment.
Much of the reason for this can be traced back to 2008, where the great recession forced tens of thousands of people into self-employment. The trend towards self-employment hasn’t relented. This increased competition means you need a big budget to set yourself apart from your competitors.
Reinvesting a portion of your profits into marketing could bring in more customers, as well as up-sell existing customers.
5. Improve Your Cash Flow
Did you know that 82% of small businesses closed their doors due to a lack of cash flow?
Plenty of profitable businesses have fallen by the wayside with great ideas and big clients simply because they lacked the funds necessary to maintain themselves. When outside funding isn’t available, entrepreneurs often turn to their personal bank accounts.
Improving your cash flow when the sun is shining could protect your business from future failure.
6. Pay Off Your Debts (When it Makes Sense)
Given the circumstances, small businesses that pay off their debts are often in a better position to elevate themselves going forwards.
Paying off outstanding debt is an option when there are minimal early exit penalties. If you can minimize your interest payments by eliminating a portion of your debt now, it could make sense. Alternatively, you may be able to pay off part of your debts via consolidation.
Before making this decision, calculate the total value of your interest payments in the long term and what you need to do to reduce or eliminate this amount.
For example, it makes little sense to avoid $5,000 in interest payments as a small business if you’ll need to pay a $60,000 lump sum to do it.
Final Thoughts
There are many ways to reinvest your small business’s profits. If you’ve had a bumper year, take the time to sit down and reflect on where you want your business to go.
Contemplate what you can do right now to get the biggest returns in the following year.
Bob Haegele is a personal finance writer who contributes several finance websites, including Modest Money and GOBankingRates. Bob writes about investing topics such as The Motley Fool and M1 Finance. He also specializes in budgeting and banking.
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