By Ryan Lasker, The Blueprint
You know what they say: When life gives you lemons, make lemonade, sell the lemonade, buy more lemons, make more lemonade, sell more lemonade, get a bigger lemonade stand, and so on.
Once your business starts making more than it spends, you need a plan to reinvest earnings, or the money left in your business bank account after paying all expenses, including yourself. When spent strategically, reinvested profits can help you further grow your bottom line.
By definition, your business is profitable when revenues exceed expenses. A profitable business has a positive number at the bottom of its profit and loss statement. When you take away money spent on taxes, interest, and other expenses unrelated to your core business, you’re talking about operating profit.
Turning a profit is an impressive feat for any small business. It means you’ve pushed past survival, a phase from which many businesses never graduate. The Bureau of Labor Statistics reports roughly 20% of new companies close within two years. Only about 65% of new businesses last more than five years.
In no particular order, here are eight ways to reinvest your business profits.
1. Marketing
Turning a profit means you’ve done something right. Word-of-mouth marketing from satisfied customers can work in the early stages of a business, but strategic marketing can propel your business to new heights by getting more eyes on your products and services.
Marketing doesn’t have to mean advertising on the bench at a local bus stop. It also doesn’t have to be pouring thousands of dollars into Facebook ads. The broader field of marketing includes conducting market research -- such as holding focus groups -- and compensating customers for writing testimonials. These investments can help you identify new customer profiles and attract new business.
It’s hard to say how much of your profits should go into marketing expenses. However, once you start putting some money into marketing, you can track your success with a host of marketing metrics, such as website bounce rate and return on investment (ROI).
Start by creating a marketing plan that hones your goals, whether it’s growing your customer base or educating the public about your product.
2. Research and development
Your business’s first profits can be a proof of concept, but there’s always room for improvement. It’s wise to use your small business profits to look inward and make your products and services even better.
Research and development (R&D) projects aren’t exclusively for manufacturing businesses. Any business can benefit from spending a little money to improve its business functions.
Say your new tea shop received a few complaints that the thumb loop on the teacups can be too small for some. You might purchase a dozen unique mugs from your supplier and comp a few customers to give you feedback. To speed up the payment process, you might research and test a new point-of-sale (POS) system.
The federal government encourages small science- and technology-focused businesses to invest in R&D activities. From SBIR grants to the R&D tax credit, you might not even need to spend your profits on a portion of your R&D undertakings.
3. Inventory
Sometimes, the best way to reinvest profits is to buy more inventory. Regularly selling out of popular products is a sign to increase your order volume to capture the sales you’ve been missing.
For example, bike sales in the U.S. swelled amid the COVID-19 pandemic. Unfortunately, many bike retailers were wiped out of inventory within weeks and lost out on innumerable sales because they weren’t prepared for the sharp increase. And now, due to pandemic-related production holdups, it could take time before stores are fully stocked again.
Sometimes, selling out is unexpected and unavoidable, as with the bike shops, but you might have more control in other situations.
However, buying too much inventory risks expiration or obsolescence before it’s sold. Having too much stock can threaten your business’s operating cash flow, tying your money up in goods that aren’t flying off the shelves fast enough.
Try using the economic order quantity (EOQ) model when making your next inventory purchase order.
4. Continuing education
Entrepreneurs are lifelong learners, always learning something new to keep their business moving. Consider reinvesting your profits in courses or seminars to hone your skills. Employees can also benefit tremendously from continuing education courses that are relevant to their positions.
Continuing education isn’t just for the medical, legal, and financial industries. No matter your industry, there’s likely a course or seminar available to educate you and your employees on best practices and techniques.
Business owners who enroll in an eligible educational program relevant to their field of work and earn less than the income limit might be able to use the lifetime learning credit to reduce their tax bills by 20% of tuition expenses, up to $2,000 in a year and $10,000 in a lifetime.
5. Business emergency fund
Building an emergency fund is vital to any small business. Having two to three months’ worth of essential expenses -- payroll, rent, utilities, and supplies -- locked away can make the difference between surviving or succumbing to temporary losses of income.
An emergency fund can keep you solvent after losing a major customer or temporarily closing due to COVID-19. While it might not feel like a reinvestment in your business, an emergency fund buys you time when you need it most.
The median small business has just 27 days’ worth of cash runway, according to a J.P. Morgan report. Just 25% of small businesses have enough cash to last two months if revenues ceased.
6. Employees
If your business is doing well, reflect on whether you’d like to expand your workforce with a first or additional employee. It’s also an apt time to thank your current employees for helping you build a successful business.
Deciding when to hire a new employee is difficult. Create a set of projected financials to play out how your business would fare over the next few years if it hired a new employee. If future profits look good, and you have an inkling that now might be the time, take our advice on hiring top talent.
Don’t forget to acknowledge the employees who helped you reach your profit goals. Not only do happy employees do the best work, but replacing departing employees costs more than just money.
Think back to the jobs you’ve had, and ask yourself how long it took to feel comfortable and autonomous. Depending on the job, it could take weeks or months for you to get things done without another employee’s help. Put clinically, the lapse in efficiency can hurt your bottom line.
If you have room in your business budget, consider offering a small bonus to your current employees, and survey their benefits package to see if there’s room for improvement, such as adding a matching 401(k) plan.
7. Software
Investing in software can reduce time spent on the tasks that irk you, and I take no offense if accounting is one of them. Streamlining your core business functions -- sales, human resources, accounting, payroll, project management -- gives you more time to work on other revenue-generating reinvestment activities.
Take a look at your administrative workload and identify the most laborious, tedious tasks. Chances are good there’s an affordable software solution available to take most of the work off your hands. It’s also likely we’ve already tested the best software in that category and have a recommendation.
8. Equipment
To stay on the cutting edge of your industry, you might want to upgrade your business equipment.
It’s a good idea to invest in new machinery and equipment as your current assets age and become expensive to maintain. Rather than pouring thousands into repairs every year, upgrade to a more energy- and cost-efficient piece of equipment.
Depending on the equipment you’re buying, you might be able to write off the asset's entire cost in the year of purchase with bonus depreciation or a Section 179 deduction.
Like lemonade, profits are sweet
Reinvesting your business profits is the best way to keep growing your company. While it might be tempting to up your owner’s draw, the reward of increased profits down the line will be sweet.
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