If your small business is generating profits, it’s great news. Usually, profitability signals success through favourable sales and revenue, balanced against cost-effective production and a robust pricing model.
Profit is also key to unlocking your ambitions. With money to ‘spare’, you can open opportunities for your business, helping to expand, strengthen and build sufficient savings. However, you need to invest your profits wisely to reap the benefits and fuel the long-term success of your business.
In this guide, we explore how SMEs should invest their profits for maximum results.
How do I decide where I should invest my business profits?
Before you start considering investing your profits, there are a few questions you need to ask yourself.
Firstly, most business owners underpay themselves and if they looked at what hourly rate they actually paid themselves, they would be shocked. Make sure that you utilise your profits to pay you the right level of reward.
Next, make sure you are covering your financial commitments. If there are outstanding loans, your profits could be used to clear the balance as long as it doesn’t hurt your cashflow. Similarly, if you are concerned you might not be able to keep up with future payments, it might be worth putting your profits into reserves so that you have a safety net to fall back on. It is recommended that businesses build up reserves equivalent to 3 months of costs.
Once you have your financial commitments are covered, you can look at other ways to invest your profits.
To select the right option for your business, you need to focus on what will help you the most. This should align with the goals you have set for your business.
The investment options
There are plenty of options open to small businesses looking to make the most of their profits. Below, we’ve listed the main areas to help you find the correct route.
Fund growth
As we’ve already mentioned, profits can be used to fund the scaling of your operations – such as the cost of new equipment, hiring staff, obtaining premises and enabling new processes or innovation in your plant.
This is particularly beneficial, as it enables you to generate more revenue in the long run if done correctly – leaving you with more profit you can reinvest.
Ensure that any growth tactics you employ make sense for your business and align with your objectives. This will allow you to grow sensibly, increasing the chances of ongoing success and prevent profits from being wasted on measures that do not benefit you long-term. You can also utilise growth finance options alongside your funds to ease the pressure of cash flow and allow you to meet larger goals.
Profits (cash) will help fund mergers and acquisitions, alongside external finance, which is a common tactic used by small businesses who want to expand their operations by taking on another company in the industry.
Strengthen your operations
Before you pursue growth, it’s ideal to have your existing operations running at an optimal level. If you’re not quite at that point, it may be wise to use your profits to strengthen them.
Strengthening your operations can require reinvestment in infrastructure to make processes run more smoothly. It could also mean replacing dated equipment, providing refresher training to staff or even just sprucing up your workplace to make it more welcoming to staff and customers.
Ideally, you should not need to re-engineer your operations frequently. However, if you find yourself stuck in a rut, it can be a great way to get back on form. This can then fuel growth in the future, with a solid foundation to build on.
Optimise business functions
Every business has several functions that power its operation. However, sometimes specific functions may underperform or be limited. If this is the case, consider using your profits to invest in optimising those functions.
For example, let’s say your SME has a good customer base and regular sales, but you have never fully embraced marketing. Using your profits, you could choose to grow your marketing department and increase their annual budget. As a result, your business will grow through more sales and brand awareness.
The same principles could apply to any functions you believe need a helping hand, either because it’s not operating as well as you think it should, or there’s untapped potential. Consider funding recruitment, staff training, equipment and process changes that will enable those functions to flourish – making your business stronger as a whole.
Product development
The next step in your growth journey might be to introduce a new product or service into your remit, helping you to serve your customers better, target new audiences or gain a competitive edge. If this is the case, you will need the funds to develop your offering.
By investing your profits into product development, you can expand your offering with products and services fit for purpose, aligned to the target market and quality-driven. This will enable you to grow your market share and increase sales, driving revenue and profits in the long run.
Pay your staff
We’ve already touched upon the importance of ensuring your staff are paid promptly before you invest your profits elsewhere. However, when you have money to spare, it can be beneficial to fund staff raises or bonuses.
While all your staff should be fairly paid, offering salary increases are a great way to increase morale, improve staff satisfaction and keep your workforce motivated. Bonuses can also give them a reason to work hard, especially if the compensation relies on you having a profitable year. By undertaking such measures, you can reduce staff turnover (which lowers your recruitment costs and minimises disruption), improve retention and empower consistent productivity across a happy workforce.
Grow your reserves
Having a solid bank of reserves may prove a lifeline if your business ever falls into hard times. As such, it is sensible to use any profit you make to build your rainy-day funds, in case you need them.
If you aren’t too sure what you want to invest your profits on now, putting it into a savings account will enable you to have the money available. Reserves can also be used alongside external finance to fund any projects you implement, such as buying property or assets.
It might be worth consistently putting a portion of your profits into reserves each month, even if it’s a small amount. This will enable you to steadily grow your reserves while still giving you the freedom to reinvest the rest of your profits elsewhere.
Remember, if you are putting your reserves into a business bank account, aim to find one that offers reasonable interest and allows you to move your money as you please.
Invest in shares
When you start generating profits, it might be at a relatively low level and not enough to fund any grand ambitions you have for growth. Instead, your aim might be to increase your profits so that you can go on to fulfil your goals.
In this case, you should consider investing your profits in shares. It’s an excellent approach for growing your excess reserves, so long as you make sensible investments and are willing to accept the risk that you might lose money.
Index and mutual funds provide steady returns that far outweigh what you experience in a savings bank account. If all goes well, you could be looking at a reasonable return on your investment, increasing your funds substantially.
You should only invest in shares if you are comfortable in doing so and in the full knowledge that you could lose it all, if the market doesn’t work in your favour – this shouldn’t be done if any funds lost would damage your business. It is important to get independent advice in this regard.
Conclusion
Profitability is something to be celebrated as a small business. By being clever with your profits and investing it in the right way, it could spell even greater success down the line – whether that be completing growth targets, optimising your offering, rewarding staff, building reserves or just increasing your funds.
With this, you can reap the rewards, helping you to continue to generate profits and restart the cycle again and again.
If you’re wondering how best to invest your profits in a way that boosts your business in the long term, we can help. Get in touch with us today to discuss your options and find the right solution for you.