Reinvesting in your business

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It makes sense in many respects to reinvest any free cash in your business.

Building a cash buffer for lean times is always a good strategy, but your reinvestment does not have to be limited only to this.

Putting aside profits is the most effective way to stave off a crisis in the event of unforeseen circumstances cropping up. It’s also a great way to reduce your stress. Such money should ideally be placed in an interest-bearing account, such as a money-market account, that gives you some flexibility in terms of how quickly or easily you can access that money in case of a cash emergency. This type of proactive cash management will also help you to demonstrate prudent business sense to potential funders or business partners.

Improve efficiencies that will increase your productivity, and thereby profitability: This could be in basic business equipment that allows you or your staff to be more productive - whether a faster computer, printer or software. Such reinvestment is in the long-term sustainability of your business.

Invest in yourself or your employees through training: This could be to increase your knowledge or understanding of an aspect of your work, or in an area, you would like to expand into but currently, don’t have the expertise.

 

Consider activities that add value to your business and brand: This could be in marketing activities that will bring in new business, or in freshening your brand or packaging if you’re in the product business. These last two activities should always be undertaken with a portion of your profits once you’ve squirreled away the bulk of your cash into some form of long-term savings. Business, by its very nature, is unpredictable. By adopting a responsible attitude towards your cash reserves you should be able to ride out any hiccups. Once you’ve reached a point where you have your future secured against unforeseen crisis you can start considering taking additional profits out by way of dividend payments to yourself or business partners. You will also know you have the right business partners if they recognize the importance of building a buffer instead of demanding that profits be paid out to shareholders.

Key takeaway: Business survival is about being able to ride out the lean periods by having managed your cash resources prudently. Plan for the long term by being responsible in the short term.

 

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38 comments
    One of the early challenges is to understnad what percentage of turnover you need to allocate to reinvestment. Wouldn't it be great if their was a guideline that we could all work on? And then of course we shouldn't forget that reinvestment is not just in stock and equipment but in yourself and your staff too... upskilling yourself or yourstaff is also an investment
    On the first point in the article - creating a financial buffer. I wish I had recieved this advice when I had my first business it was ultimately what caused it to close. Mybusiness was doing well and I was living the lifestyle to matchwith no real contingency plan for ant potential crisis given it was my first business and I was young and green. Three years in and I was sitting pretty untilmy biggestclient amounting to 40% of my monthly turnover changed their buying policies which meant Icould no longer viably supply them. With no back up plan/buffer Iimmediately lost 40% of my business and unfotunately due to the already small market I was operating in just could not recover. This does not happen over night however due to our credit lines smart inventory buying and eventually trading as a cash businesscaused me to hang on for 2 more years - ending up in enormous debt which I am still paying off. It may seem as if it isn't the most important consideration but looking back it would have probably saved my first business!
    hi I kike to suggest an amount equal to have 3 to 5 x your monthly budget in reserve
    The problem is that as soon as money stars rolling in most small business owners go straight to PAYE and that is not the income tax its Planes Automobiles Yachts Etc In the early days you don’t need a faster car or a fancier phone you need equipment that generates more product or a marketing plan that generates more income. It is such a familiar trap
    Starting a small business is not for the feitn hearted and we can all use all the help we can get. Unforttunately we often don't know where to look or are too afraid to ask
    I agree Mike this info should be readily accessible. I did find an article the other day that was pretty interesting though: http://www.inc.com/john-boitnott/how-much-of-your-business-capital-should-you-reinvest.html
    So try Mike think it is important very early on to decide exactly what percentage you are willing to set aside every month to reinvest in your business. Aside from that one very simple strategy I use is to transfere my vat allocation for each job into a seperate account after every payment recieved (I also round it up to 15%) after all the VAT caculations and payments are done I accumulate those small amounts in that account.... It is amazing how much you manage to save by the end of the year with out much effort.
    That is a great strategy Gareth! It helps you to realise how much money is actually yours...it's easy to get excited when you look at your bank account and don't have Vat in mind only to be dissapointed - or worse short- 2 months later.
    Yeah Very important to have a few months operating expenses in reserve! I also learned early on that markets change very quickly... so always have a backup strategy!
    Hi thecashflowguy would you mind elaborating for me? How do you build up to this as a small business?
    School fees I guess! What were the other big mistakes you learnt from early on?
    Most of us start our business on a wing and a prayer and hav no idea what our operating expenses are. Do you have any ideas on how to calculate that in the early days and how to start puting that money away for those rainy days.. I knw that is advice I could really use
    I think it is also very important to also realize that reinvesting in your business does not necessarily requirelarge sums of money as entrepreneurs the biggest investment you can make is to invest in yourself and in the age of information very often this is free! Google Ted talks as well as a whole host of universities that are offering free online courses means that it is now easier than ever to upskill yourself and strengthen your weak points as an entrepreneur and business owner. Marketing your business has also become a lot more affordable if you are willing to use a little sweat equity social media truly allows you to drive your business with just some time effort and a little help from your friends.
    I like Gareth's comment but even if you start with an affordableamount that is put out of sight but still accessible... eg if you have an access bond pay a small amount extra every month if you dont have a bond open a seperate account that is linked to your operating account
    Living the rockstar lifestyle is a very easy trap to fall into so important to stay modest and think frugil!
    For those of you who don't know THE CASH FLOW GUY he is worth follwoing on all channels he has simple and practical advice for small business owners I remember him expalining how you can start your accounting with a couple of shoe boxes and work up from there. Ony problem is after 10 years I am still using the shoe boxes
    True story Mike! I have started every venture I have tried on a skill or idea I think people could use with nothing but my own confidence and a little savy (only after a few years though) and some more successful than others...what business are you in?
    ALWAYS very wise to invest in yourself! Every day we should strive to be a learner and a teacher. I have a slightly different take on the strengthening of your weaknesses though.... if at all possible rather strengthen your strengths and employ other assistance to take care of your weakpoints. Maybe thats why a fast bowler should always bowl with the wind rather than against it??
    Well TheTastyChef based on your comment I also learned to diversify my client base as much as possible I also relied very heavily on one single client but when they changed their procurement procedure I found myself competing against other suppliers with much lower overheads so could beat me on price point the only way for me to stay in business was to ensure I had a higher quality product but also reduced overheads to offer more competitive pricing.
    Thanks Cash Flow Guy how do we follow you on your various channels? I could sure use the help and I have plenty of shoe boxes I could use to sort out my accounts(from my early days of spending my profits!!)
    You got into the recycling business @mikesaidwhat ????
    That's UPCYCLING to you sir! Visit www.tufcom.com and take a look. It's a scary prospect starting a new venutrue at 55 but what the heck
    I think required reading for startups and young entrepreneurs should be The lean startup and ThFrugalil Entrepreneur really puts things into perspective... you do not always need a massive injection to get your business going... in fact you usually better off if you don't have that luxury.
    Lol..... you sound well heeled :) Check out @AdvThaynCfp.....
    Cashflowguy could you please share you links so that I can also follow?
    Thanks Gareth mainly Twitter a bit on Linkedin https://www.linkedin.com/in/thayn-niemand-cfp®-7482709 and some articles for Moneyweb...abd you?
    In fact a great idea would be to start a discussion just on books you should be reading as a startup... there are so many great ones!
    The old days on It's My Biz Watch this YouTube
    Totally agree you gain so much insight and inspiration from reading the right books!
    I enjoy reading books that deal with negotiating skills one I can recall @Mikesaidwhat was something like 62 ways to negotiate a better deal' short easy and very useful