Whether you’re running a new business or a generational family business, as a business owner, there’s no greater feeling than when you look at your balance sheet and see your business’ bottom line growing. But now that you’re making profits, where to invest them?
In this blog, we will share the various profit investing options your business has and why these options can benefit your business in both the short and long term.
Why is it important to invest small business profits?
Investing the profits of a small business is an important aspect of running a successful business as it allows owners to manage future and sustainable growth.
Profits are financial resources that your business has already earned, meaning they are not derived from a loan and your business is not financially responsible for them.
Profit reinvestment can help you create a positive feedback loop for your company: Profit reinvestment leads to business growth, which leads to more profits, which leads to more reinvestment, which leads to more business, which leads to more profits, and so on.
Where should profits from the business be invested?
You have many options for reinvesting business profits. Below we will discuss some of them. However, first know that it can be beneficial to incorporate your business reinvestment plans into your business model. This way you can set clear goals for your future net income.
Take time to think about questions such as:
- How will this help my business?
- What areas of investment will help my business the most?
- How does this investment fit into my long-term business plan?
By thinking about these issues early on and developing a business model and plan for the future, you can ensure that you are not investing in arbitrary, disconnected, and disparate aspects of your business.
You must strive to ensure that your reinvestment serves a greater purpose in the grand scheme of your business. A good overarching question is, “How will reinvesting in this area of my business affect my business in 5 to 10 years?”
Where to invest your business profits?
There are many areas of investment. All of them have certain advantages. We would advise you to turn your attention to areas that will contribute to the growth of your business, but initially will not require large investments.
These areas are:
- education;
- advertising;
- development and launch of new products; development and search for new business contacts (participation in seminars, master groups, coaching, etc.);
- recruitment of new employees;
- software tools (new programs that make business easier);
- testing new strategies.
Each of these areas has an initial investment.
For example, investing in Facebook ads can cost you some money. But it can also be your best source of new clients. Here you have high growth potential, and low initial costs.
You can spend money on a freelance copywriter. But he can write the kind of advertising text that will bring you big sales. Again, high growth potential, low initial costs.
In other words, you will get more profit by investing in the development of your business.
This is also possible if you are investing third-party capital in the search for that very popular product. Once a product has been tested on the market, you will have a certain sales target and thus you must and can use external capital to fund sales of that product.
Here is a prime example in numbers. Change in ROI from the use of own and third-party capital.
Amazon has a service – Amazon Lending. If you take out a $100,000 loan from Amazon to invest in an item, you’ll pay between 5% and 10% interest to use it. That is, you will pay approximately $ 10,000 for using the loan.
Thus, if your profit is $200,000, then by using borrowed funds, you increase the ROI by 10 times.
See for yourself:
By investing your own $100,000 in a product
ROI ($200,000/$100,000) × 100%=200%
Borrowed $100,000 and paid only $10,000 in interest
ROI ($200,000/$10,000) × 100%=2000%
It turns out that you thus freed up $90,000 of your own capital, which you can invest in business development (education, hiring employees, etc.)
This means you finally have the capital to launch the next product you were considering or maybe you can afford to hire a copywriter. Or you can spend this money on yourself and, finally, go on vacation, gain strength and new ideas.
The longer you can predict the sales of your product, the longer you can use this scheme.
Your goal is to invest in areas that will help grow your business and yourself. And as an entrepreneur, you must understand that investing money can be both in yourself and in a business. Each of these actions has its own ROI.
See ya!
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