It can take startups anywhere from three to four years to become profitable, according to some statistics[1]. Once that happens, it might be difficult for small business owners to figure out where those profits would be best spent. This is especially true for those who may have held off on important things — like paying themselves a salary[2], perhaps — while the business was growing. Before spending any of that cash, though, experts recommend one strategy called strategic reinvestment. This approach has been proven effective in helping grow businesses, but only if it’s done with some special considerations. Here’s what you need to know to execute strategic reinvestment properly.
Why is Strategic Reinvestment Important?
Cash flow is the lifeblood of any business. While smart business owners should plan for at least a few years of minimal to no cash flow while a company is growing, the moment that a business does become profitable is certainly something to celebrate. Before initiating a spending spree, though, business experts recommend ensuring that a certain percentage of that cash is being reinvested right back into the business. This, when done strategically, is referred to as strategic reinvestment.
There are several reasons why putting some of your profit right back into the business might help you attain sustained growth over time and, possibly, increase your profit margins even more. For example, when done right, strategic reinvestment can help bolster some of the most essential areas of a business.
How Much Should I Invest Back Into My Business?
Reinvestment takes careful consideration. If you ask around, experts tend to recommend reinvesting anywhere from 20 percent[3] up to 50 percent or even 70 percent[4] of your profits back into the business. But that’s just the end of the story.
Start by understanding exactly how much profit you actually have. How much do you owe in taxes, for example, and how much will you pay in additional tax based on how you spend that money? Do you have money put aside to draw from should something happen to the business, like a flood or theft?
Next, consider the laws that govern how you spend money you bring in from your business. Your business's classification—whether it’s an LLC, for example—will help dictate where and how much you can spend in certain areas. If you aren't already, consider working with a professional business accountant to help you figure out the specifics.
Where Should I Invest the Money?
With the “how much” figured out, you can move on to determining the “where.” Some of the most common and, arguably, best options include:
Building a better workforce. It’s hard to get business done when no one is there to keep the lights on. Perhaps that's why 21 percent of business owners say they expect to increase their full-time workforce in the next six months[5], according to PNC's latest semi-annual survey of small and mid-sized businesses. In the same survey, though, 9 percent of owners claimed that high salary/benefit or flexibility requirements were one of their biggest hiring challenges. Injecting some muchneeded cash flow into your payroll may be just the incentive your current employees need to find their motivation and/or to help you entice new, talented employees into your company.
Increasing efficiency. We’ve all heard the buzzwords. Data-driven insights. Real-time accounting. Customer relationship management. Conversational artificial intelligence. However tired you might be of hearing them over and over, these buzzwords exist for a reason. Businesses that determine the best type of technology to reinvest their profits in will be ahead of the game. That also means being better able to stand up to the competition when it comes to operating at your most efficient output.
If you work in healthcare, for example, you might want to consider how AI can best be used in your practice. The same goes for veterinary practices — how will advances in Vet Medical Technology impact your future? Are there any new technologies out there that could help you grow your dental business? Or are you currently using the best operating system for your restaurant? Whatever business you’re in, there’s bound to be a technology that can help you be more efficient. Figure out what it is and make plans to invest in it.
Expanding the business. If you’re anything like the 21 percent of small business owners who expect to increase their full-time workforce in the next six months[5], you’ll need cash to do it with. Even if money for extra salaries or a physical store isn’t on your radar, branching out to expand your internet offerings through things like adding additional websites, growing your social media presence or investing in email or online ad campaigns are all great ways to get your name out there.
Making customers happier. Customers can be fickle. But understanding their desires from one moment to the next is one of the best ways to stay in business. By investing in technologies that make their shopping experiences simple and streamlined — through things like an optimal restaurant and retail operating system (or any of the best POS systems for your business, for that matter) — you’ll be sure to keep them coming back for more.
Business owners have a million things on their mind. Adding one more item to their to-do list — figuring out how to implement strategic reinvestment to make the most of its offerings — might sound daunting, but it’s actually a to-do to celebrate. Not only does it mean that your business is turning a profit, but that you get to take some time and consider where you can make improvements, and then actually execute on them.
PNC Business Banking experts are here to help you through your business needs every step of the way. Whether it’s setting up a business checking account, opening up a line of credit to grow your business or scheduling an appointment to chat in person, we can’t wait to get started.
