At a time when your business is making huge profits, you should think about investing in the business again.
But first you need to decide what percentage of the profit you want to invest back. Investing back is a very important factor for small businesses to scale. Making a profit is exciting - especially for new businesses. But after you've covered your basic expenses, the next wise move is to re-invest in your venture. This will not only promote the growth of your business in the long run, but also improve the speed and quality of your work. Let's take a look at what you need to keep in mind when investing.

Why invest?

As the saying goes, "you have to spend money to make money." The same is true when it comes to reinvesting in your business. While you have the right to enjoy a portion of your hard-earned profits, the best way is to invest a portion of them back into your products or services.

In addition to ensuring the long-term stability and success of your business, investing in your venture is a good way to stay out of debt. When it comes to financing small businesses, debt and equity funding are two of the most common options. Reinvesting is a type of equity finance; it allows you to transform your business without having to borrow money. This is one of the biggest assets your business can have.

How much should you invest?

Answering this question isn't easy. The truth is that economists and entrepreneurs have not yet reached an appropriate figure. Only a few models are available, such as Mikhailovich's profit-first model. This model claims that business owners should set a strict monthly budget for their profits after taking into account expenses such as salaries, suppliers, and taxes. However, this method may limit flexibility and discourage further growth in the future. This is not a model for everyone.

Other businesses follow the 50-30-20 model. Adapted from the 50-30-30 model of personal finance, this framework has been adapted to suit the needs of businesses. It recommends that business owners set aside 50% of their profits for themselves, 30% for taxes, and 20% for reinvesting in the business. This model provides business owners with a reasonable amount of money to enjoy, prepares them for future tax implications, and helps them reinvest. Despite this, such a rigid financial model is not suitable for many businesses.

Finally, it is generally recommended that business owners reinvest at least 50% of their profits. It is said that limiting your income in the beginning will make your future remuneration bigger. While this disciplined approach is likely to be conducive to long-term growth, reinvesting such a large sum of money is largely unsustainable, especially for businesses with low turnover.

All of these models have advantages. However, there is no specific rule regarding re-investment. Every business owner should base their calculations on the different circumstances of their enterprise. Below are some factors to consider when making your decision.

What are the main objectives of the business?

The first thing you need to think about when calculating the reinvestment percentage is your primary business needs. Business needs are the gaps between the current state of the company and its objectives. They can cover any area of your business that needs to be worked on to sustain growth. By identifying these key needs, you can identify which areas of your business are most in need of investment. Some examples are employee training, new recruitment, new equipments, expansion of office, marketing and so on.

Product and service development

Each enterprise has its own vision of what the long-term goals of the business are, and the business objectives help them achieve these goals. The amount you bring back to your business greatly affects your chances of achieving these goals. Therefore, it is important to review the goals of your business when arriving at a figure.

When you think about your goals, there are many things to consider. If you want to expand, you should consider whether you want to keep your business or if you want to potentially sell it further down the line. By considering the bottom line and reviewing the plans, you'll get a much clearer indication of how much you need to reinvest. If you don't have clear business goals, now is the time to start. They will give you a clear direction and a way to measure progress.

How much revenue does the business generate?

While the needs and goals of your business are important, the amount that can be invested back is largely determined by its financial circumstances. So, another important thing to consider when deciding how much to reinvest in your business's revenue is how much revenue you have.

In addition to measuring your business's revenue, you should also evaluate your current cash flow and your cash flow forecast. By reviewing these figures, you can get a sense of how much money you need to set aside for your business at any given time.

FAQ

What does it mean to re-invest in business?

Business reinvestment refers to bringing a certain amount of your profits back into your business. This is an effective way to increase the value of your business and invest in its future growth.

Is it important to invest in small businesses?

Yes, business owners need to reinvest in their enterprise for a number of reasons. Reinvestment will allow businesses to expand their existing locations, improve the quality of their product or service, and strengthen or grow their team. By doing so, you can improve employee satisfaction, create more sources of revenue, and support the long-term growth of the business.

What areas of your business do you want to invest in?

If you've decided to reinvest in your business, there's no right or wrong way to spend money. You should choose to invest based on the circumstances and needs of your business. However, as an approximate guideline, some popular areas to invest in include employee training, hiring, digital or office equipment, office space, marketing, or product and service development.

How much money do I have to invest in my business?

It's up to you to decide how much you want to invest. Before you make a decision, there are a few things to consider. For example, take into account the main needs, long-term goals, income and the amount of money you want to take. This will help you decide on a suitable percentage for your business.