Starting a business begins with having a great idea and pursuing it with passion. If you are an entrepreneur, this part is exciting and may even come naturally. But what often is not as intuitive is figuring out how to ensure the company is turning a profit year in and year out.
While this process requires a different skillset, it is no less important. Tasks like analyzing cash flow, planning for expenses, deciding how much, and when to reinvest, and what to take as profit, etc., are important parts of achieving future growth. Ultimately growth requires reinvesting in your business. Therefore, you’ll need to achieve a balance between profit and investment.
One school of thought rests on the notion that setting a strict monthly budget, including allocating a set percentage toward profit in addition to expenses and taxes each month, will result in proof at the end of the year that the company is indeed profitable.
Following this methodology negates your ability to be flexible if an opportunity for growth arises that effectively wipes out profit that year but results in a big payoff down the road. So how much should you reinvest to properly take advantage of future growth potential?
There is no formula
There is no exact formula that you can utilize to calculate how much to reinvest into your business every year. Short-term and long-term business planning is a dynamic process that needs to be frequently reevaluated and adjusted. To arrive at a plan, understanding your business and goals is only one part of the equation. You will also need to take into account additional factors that can affect your success.
If this pandemic has taught us anything, it’s that business planning is not an exact science. You’ll arrive at some contributing factors, such as inflation, using your best guess at the time. The ability to be flexible if/when factors not within your control do not meet your estimates is critical. This can be a difficult concept for a business owner who has run things the same way for years.
The value of expert advice
Knowledge is power, and it can be valuable to solicit ideas and feedback from business experts. Many business owners find mastermind groups to be incredibly helpful. In addition, working with a business consultant who can propose new strategies, help broaden your knowledge base and introduce alternative planning methods, can be invaluable.
Whichever method(s) you choose, you’d be well advised to consult experts who can help identify situations in which reinvesting in your business takes precedence over profit. And don’t neglect to take advantage of the vast store of business information online. As just one example, the qualities of great corporate leadership are outlined in what it takes to be a successful CEO.