Achieving profitability is a significant milestone for many small business owners, who must then ask themselves, ‘Now what?’ What is to be done with the hard-won profits the small business owner has earned?
The small business owner has a choice to either reinvest the profits or distribute them to the owners of the business. There are no easy solutions as each small business owner’s circumstances are different – some can afford to forego some or all of the profits and live on their savings or other sources of income, whilst others need the profits generated by the business to ensure their personal survival (and the survival of their dependents).
There are also instances where the small business owner is accountable to shareholders or business partners with a stake in the business, and the interests of these various parties need to be balanced against what is best for the business. The advantages of plowing back profits into the business include not having to take on additional debt and being able to reduce some existing debt.
Importantly, the small business owner will have ready access to funds to implement measures to grow the business (e.g. product development, hiring more people), and can act quickly in doing so. Even if not reinvested into the small business directly, the profits can be used to build up the business’ cash reserves to ensure that it is liquid and has a buffer for difficult times, or can be used to purchase listed shares, physical assets such as property or other types of investments that will be alternative long-term sources of income for the small business owner. On the other hand, there are also risks associated with reinvesting profits.
Small business owners need to reinvest wisely and appropriately, in line with the small business owner’s strategy and not being distracted by sudden whims. Shareholders who do not earn regular dividends as the business owner consistently chooses to reinvest may become frustrated and walk away, potentially impacting confidence in the business’ strategy and offerings.
If the small business has matured and the small business owner is not interested in exploring new growth prospects, reinvesting may not be the optimal use of the profits.
Post By: Fadzai Munyaradzi
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