By Shannon Leonard
We’ve written before about how to maximize startup revenues through strategic startup finance and various other strategic initiatives. And to be sure, stretching every bit of capital you have in the early going is a fundamental necessity for any small business just starting out. But finances continue to be challenging for business owners long after the initial startup process, and sometimes this goes unaddressed in pieces of advice for business owners.
Specifically, the idea of what a business owner ought to do with profits once they start coming in is not discussed frequently enough. It can be such a massive undertaking to generate profits in the first place that a lot of people don’t know how to make the most of them once they arrive. As a reminder, “profit” refers specifically to whatever revenue is left after addressing necessary expenses (debts, costs of operation, payments to employees, maintenance, etc.). Often, the temptation is to pocket the profits, given that the ultimate goal of any startup is to earn money.
However, particularly in the early going, there are far more effective ways to use profits for the good of the business, even once necessary expenses are taken care of.
Inject Cash Strategically
The basic concept of reinvestment is to inject cash back into your business for the sake of making it larger, more efficient, and simply more successful. But it’s important to not throw money at the business based on some arbitrarily concocted percentage, or any sort of standard number you might hear. Instead, apply funds in line with your specific development plan, so that whatever profits you’re able to funnel back into the company address specific goals. For instance, if you want to enhance your online presence, consider directing profits toward web design. If you’ve reached a size at which handling employee payments and management becomes tricky, set aside profits to hire someone for HR. These are just a few of many examples, but the core concept is simple: reinvest based on strategy, not percentages.
Because profits are theoretically your own once you’ve paid any employees you may have and you’ve addressed company expenses, another option is to funnel them into an ordinary investment portfolio. However, given the time required to run a startup, you’ll want to be strategic about the sort of portfolio you set up. To begin with, be sure to educate yourself on basic successful trading policies, so as to better understand what to do with your investments. Most importantly, get used to the idea of managing your investment with stops and limits, which are predetermined highs and lows at which you will withdraw your investment. This is a disciplined practice that can save you from unnecessary or careless risks while you’re not the most hands-on trader. It also facilitates more long-term investment. Alternatively, you can also funnel profits into a mutual fund, where a professional will manage the investment for you, often for relatively low fees.
Address Personal Debts
One popular piece of advice for startup owners and individuals alike is to save six months’ worth of expenses whenever possible, so as to have an emergency fund on hand. Traditionally the idea is meant to protect against losing one’s job, but where business is concerned, this sort of emergency fund could save a company. However, because of the personal nature of running a startup, it’s often hard for an entrepreneur to justify an emergency fund if he or she still has personal debts on hand. Even something like a student loan is better taken care of as quickly as possible—partly to free up future profits for flexible use, and partly because such debts generally become greater burdens over time. A debt-free business owner is an empowered one.
Through each of these ideas—direct reinvestment, external investment, and addressing personal debt—you can make effective use of even small profits. The goal, at least while the company is still new and growing, should always be to keep improving however possible. This is as much a financial goal as it is one about effort and innovation.