The power to transform your ideas into real products and services is one of the most fulfilling parts of being a business owner-and when those ideas become profitable, the feeling is even better. Deciding what to do with those profits is an important part of running your business, starting with determining what percentage of your profits to reinvest.
The first step is to determine how much of your profits are actually in excess of what you need for basic operations. If you have been keeping good financial records, you should have a clear idea of how much it costs to pay your employees, manage overhead costs, run marketing campaigns and cover other monthly expenses.
In addition to considering past expenses, making an accurate projection for future growth is crucial. In some instances, as a business's profits grow, its expenses also grow; for example, if more employees or a larger physical space is needed. If increased profits and increased expenses are both anticipated, make sure to make a long-term projection for both. This will ensure that there is sufficient cash flow at all times, particularly if there is a large, one-time expense coming up, such as the purchase of new machinery. Adequate cash flow to cover operations should always be the first priority in your budget.
After you determine how much of your profits must go toward ensuring adequate cash flow, you may finally consider the percentage of your profits that will be allocated for your salary.
"Don't fall into the trap of believing that early on, all your profits should be your salary," warns Forbes contributor Larry Myler. "Set a clear goal of how much profit you will reinvest quarterly, and then stick to it."
Don't be discouraged if you aren't taking home much of a salary in the early stages of growing your business. That is a common fact of life for many startup owners, even for those who go on to be very successful.
"Ask any successful entrepreneur how much personal salary they drew during the early years of their company, and the likely answer will be zilch, or very little more than that," Myler states.
Once you have calculated your upcoming expenses and salary requirements, you will have a clear idea of how much you can afford to reinvest. John Boitnott, a journalist and digital consultant, says investments in your and your employees' personal development are a good place to start.
"Training and experiences for [you] 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," Boitnott writes in an article for Inc.com.
You can then see how much of your quarterly reinvestment allotment remains and use it to tackle other projects, such as hiring new employees, revamping your website and replacing old equipment. You should also invest in maintaining a solid online presence and strong marketing, taking care to analyze the results you are getting from each marketing channel to ensure your profits are being spent in the best manner possible.
Remember to make accurate tracking of expenses and profits a top priority, keep a close eye on your cash flow, and stick to your reinvesting goals, and you'll be on your way to steady business growth-a prospect that is both emotionally and financially rewarding.