For many businesses, it can take years to reach a point where sales are high enough to turn a profit without tax loopholes and fancy bookkeeping. It's at this moment that a dilemma arrives; how much of your capital do you reinvest, and how much do you squirrel away?
There's a lot to consider when you're deciding on your reinvestment strategy. Smart reinvesting can grow your business as quickly as investment in marketing or product optimization, but a poor decision at the wrong time can hamper your long-term growth.
Hindrances to Reinvestment
One thing you need to keep in mind is the amount of perpetual income you need to have on hand to meet your commitments. A web business, for example, needs to be able to keep a website alive, keep employees paid, keep customer service active, invest in development, marketing, testing and more. A larger physical business has more commitments, from product shipping to leases on warehousing and office space. You can't reinvest money if that money is needed to pay your employees or ship your products.
There's also future growth to consider, both in a positive and a negative light. Do you expect your profits to grow over the next six months or year? If so, do your commitments increase as those profits increase? Will you need to rent more space, invest more heavily in manufacturing or hire more employees?
Reinvesting is Risky
Every investment is a form of risk. Smart investing relies on the ability to manage that risk for the greatest reward. Betting on the long shot might have a chance at a much higher payout, but if it loses, you gain nothing. Reinvesting for your business can work the same way. The safest reinvesting options safeguard your money and bring in a small profit. Add a little risk and you'll take away a greater reward. Push the risk too high and you may very well end up with nothing.
Reinvestment is often about more than just the money. Your time and the time of your employees is valuable as well. If you can reinvest your time in a way that, through mentors or partnerships, helps improve your business, you're making a cash-free reinvestment.
A Reinvestment Hierarchy
There is a certain hierarchy you can use to determine how much you should reinvest, and where. First, and most important, are your increasing commitments. As mentioned, you need to have the cash flow on hand to cover your current commitments and the commitments you anticipate growing over the next six months.
Second is a reinvestment in yourself. Training and experiences for yourself and your employees will be a long-term investment that pays off every time some of that knowledge or some of those skills are used.
Third is reinvesting in your business. Improving infrastructure, streamlining manufacturing, bolstering customer support, increasing and refining marketing; these all directly benefit your business. They increase your profits and decrease your expenses, potentially giving you more capital to work with.
Fourth is external investments. Look at Facebook. Last year they purchased Atlas from Microsoft, which many people questioned due to the decaying nature of the ad network. Now they're rolling out a new and improved Atlas that can position it on par with Google. Smart investments, rolled into your business, can drastically improve your situation over time.
Of course, this hierarchy isn't strict by a long shot. What you need to do is take a look at each possible means of reinvestment and calculate a return for each. Determine the amount of potential gain from each investment, and calculate the risk. Figure out an investment strategy that makes best use of your capital, and monitor its success on an ongoing basis. Avoid cutting out long-term investments in favor of short-term gains, particularly if those long-term investments are difficult to return to once you've left them behind.
It's important to manage your capital so that you always have enough on hand to cover unexpected expenses. On the other hand, you can't be so cautious that you miss good investments out of fear for your stability.
Determine what capital you have available. Analyze your potential investments and calculate the risk and reward for each. Figure out a short term and a long term investment strategy, and put it into action.