You probably have heard that one of the keys to business success is reinvesting some of the profits into the business. It is an obvious truth which sadly many businesses do not heed well. Most businesses collapse due to cash flow related issues – not reinvesting profits is one of them. Well, it is not just enough to know that you must reinvest profits into your business. You more importantly need to know exactly how much you should reinvest. The other thing is on how much of your profits you can retain for yourself. Explaining that to you is the focus of this article.
It Starts With The ‘Why’…
In the first place, why do you want to reinvest some of the profits into the business? That is foundational in ultimately determining how much you will need to reinvest. There are numerous possible reasons why you would want to do e.g. to boost your revenue inflows. It can be to expand your human resources or to acquire some assets. It can be to build and roll out a new product. It can be to launch a marketing campaign or to train your staff. These are some examples of the many reasons why; there are plenty more.
You will then have to determine in what time frame you would want to reinvest. Then you of course will have to consider how much profit you have or are making presently. All things being equal you should know this at the top of your head. If you have been diligently doing your profit and loss statements every month this should be easy to look up. This will be followed by determining how much of the available profit you can reinvest.
To Note On Available Profit
Be cautious when determining this lest you fool yourself. This is because you must know that not all of your profit is available for use anyhow. You might overlook some liabilities your business has if you are not careful. Such liabilities must be catered for first before you say I have such an amount as available profit. From your profits subtract such liabilities; examples are debts and taxes, amongst others. So by deducting expenses and those liabilities from your revenues you have your available profit.
What Is Next?
Part of my title reads, “…reinvest or retain”, note the ‘retain’ part. That in principle is a separate thing and should come before the reinvestment part. Remember that in running a business you want to strike a delicate balance between yourself and the business. The business must be well-financed but so should your personal life be too. So the next thing is to determine how much of the available profit you will keep for yourself. It is not easy to give a proportion here because it is largely contextual. It will vary depending on individuals’ scenarios. The bottom line is that you must figure out this amount before settling for the amount you will reinvest.
So What Should The Percentage Be?
Already you could have figured out that it is variable given the context. If you follow every step I took you through you will notice that the percentage you will reinvest comes to be by default not by prior determination. This does not, however, mean that this is the only way to determine the amount you will dedicate to reinvesting in your business. There is another way:
You can from the onset decide the percentage before everything else. That would mean you will then somewhat reverse the steps I covered earlier. Then if you realize that the expenses and liabilities are not being adequately catered for you will review the percentage. All the same, you can still have the question of what should that percentage be, right? Well, there is a range that experts have coined as prudent to adopt. They say that a healthy percentage should span from 30 per cent to 50 per cent. The most widely recommended is 30 per cent though. That is the percentage of your business profits that you should reinvest. If you were closely following, this is a percentage of your available profit.
The percentage is highly variable given the different contexts of each business. However, what is vital is to thoroughly go through the steps I discussed in this article. If you do it right you will have a healthy business and personal life balance. You will be financially sound and stable on both fronts.