Reinvesting Back Into Your Business For Business Growth
Today, I want to talk about how much should you reinvest back into your business?
Big companies quite often state in their financial reports that, say, 50% or 60%, 40% is distributed, and the rest is retained for business growth.
But when it comes down to small businesses, we don’t normally have an idea in our mind of exactly how much money should be retained in the business and how much should be distributed. So this is my recommendation for small business owners, especially around the trades and things like that.
It does depend on, I guess, their growth plans in the business and whether they forecast to grow a lot and hence need more cash to do so. But just on a provisional level or nominal amount, think about 50/50.
Think about distributing 50% of profits and then retaining 50% in the business as a good starting point. Of course, you can vary it from that as needed. So I hope that helps you out to get an understanding of how much money should you reinvest back into the business.
The next step for you to consider would be why you are reinvesting and what is your strategy for this. Having a reinvestment plan as part of your business growth strategy is a smart way of utilising your profits. Remember this strategy should be flexible but give you a noticeable return on your reinvestment and not get swallowed up with the general expenses associated with running your business.
Reinvesting – An Example
I suggest reinvesting the 50% for a strong business growth reason(s) that is measurable and gives you an obvious outcome. For example we have one client that does major plumbing and excavation work that is reinvesting in traffic management as another division to their company (and another service for their clients).
This means when they are digging up roads and interrupting traffic for storm water piping upgrades they divert the traffic as well. A great example of business growth through reinvestment.