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Once your small business has started to make profits, business owners have a decision to make. You can either have the profit distributed among business owners or reinvest those profits back into the business. There are many ways you can reinvest those profits into your business such as hiring new employees or investing in index or mutual funds.
In this article, we will go over where you can reinvest your profits and the advantages and disadvantages of reinvesting.
What Is Reinvesting?
Reinvesting occurs when net profits are retained and invested in expenses or business activities to help grow the business. Reinvested income is not taxable as a business expense.
Depending on the stage of your business, you might be better off starting small if you choose to reinvest. There are several key areas where business profits should be allocated when reinvesting.
Marketing and Advertising
Having a marketing strategy is key for any business but it can be costly to use marketing platforms. You can reinvest in search engine optimization, content marketing, affiliate marketing, influencer marketing, email marketing, mobile design, and Facebook and Google ads.
New Hires
Having a solid team is valuable for any business and is a necessary expense for any business that wants to be successful and grow. You can be a one-person show, but it is difficult to take your business to the next level without the right people. You will want to retain your current employees by motivating them to stay on board. You can reinvest in new training opportunities and other employee benefits such as paid time off, free meals, insurance and more.
Capital Improvement Investments
You can also reinvest into your business by purchasing new infrastructure, equipment, vehicles, and more. By improving these aspects in your business, it can lead to higher profits in the long run.
Perhaps tweaking and improving your products will help you keep up to date with the needs of your audience and can lead to happier customers and even a new audience.
Invest in Yourself
You can use the profits to invest in yourself and gain more knowledge on how to be a successful business owner. You can take classes or enroll in workshops to help you become a better business owner to help you have a thriving business.
Advantages and Disadvantages of Reinvesting Profits
There are several advantages to reinvesting into your business. It can help keep your business expenses low and helps keep the ownership in your own hands.
One of the best reasons to reinvest into your business is the increase profit and revenue. You can attract new customers, add new products, and add new business locations which will ultimately increase the number of your revenue streams thus creating an increase in your profits.
You can also create new capital which is important if you are trying to remain competitive. Generally small businesses will stay comfortable and not take on new market opportunities, but it is a good opportunity for you use this to invest in your growth to increase demand and growth of your business.
There is a major disadvantage of business owners of reinvesting. For one, the business owner may not have another source of income other than that business that is making the profit so reinvesting may not make any sense in that situation.
Another downside is investing too early which can turn into a high personal cost. Many business owners rely on their profits to support themselves.
The Bottom Line
There are many ways a business owner can use their profits, and reinvesting is the right move. A business owner should always think in terms of the future and reinvesting will help to expand the products of the business, hire a new team, or make other investments. By planning properly, you can make your business goals a reality in the long term.
