How to reinvest in your small business?
First, work out how much you can safely use after setting aside taxes and enough cash for your reserves. Then put the remaining profit toward areas that can help the business, such as hiring, better systems, marketing, or increasing capacity. There’s no single percentage that every business should reinvest; the right amount depends on your cash position, expenses, and growth plans.
Months, maybe years, have gone by and you can finally, and truthfully, use the phrase “turned a profit,” plus the “we just” right before it. You’ve gone further up the incline, with the early gruelling stretch of the climb now far below your line of sight.
“How to reinvest profit from your small business?” is among the many things on your short-term (but also long-term) goals list.
So… HOW?
First answer: “What is profit?”
Profit isn’t money sitting there waiting to be spent. Not only; not to a business owner. It can be the next hire, a better system, a little breathing room, or something you’ve been waiting a long time to pay yourself.
Knowing where to put it can make the difference between simply having a profitable year and giving the business room to grow. Here’s what you should know about reinvesting in your business.
In This Blog:
- ➤How to reinvest in your small business?
- ➤How to Reinvest Profit in Your Small Business: Step by Step
- ➤Should You Reinvest Into Your Business or Pay Yourself First?
- ➤How Much Cash Reserve Do You Need Before You Reinvest?
- ➤The Reinvestment Business Owners Miss: Staffing Costs
- ➤FAQs
- ➤This Quarter’s Profit, Next Year’s Capacity
How to Reinvest Profit in Your Small Business: Step by Step
What do you have available? Know what you have available – a simple place to start.
Step 1: Start With Net Profit
Look at your net profit before setting your eyes elsewhere. Take out whatever you owe in taxes for the period and the amount you want to keep in reserve. What’s left is the portion you can consider for reinvestment.
Just a note on revenue and available cash, since they’re not the same thing:
A business can have strong revenue coming in without having that same amount of money available to spend.
It’s an easy step to skip when revenue is coming in, and there are plenty of ideas for what to spend it on. But revenue and available cash are two different things.
Step 2: Decide Where the Profit Goes
Decide what to do with the money by apportioning certain amounts where you want them to be. For instance, you can cut the pie like so:
30%: cash reserves
20%: owner pay
The bullets above are a sample, so you’ll definitely have to change those percentages according to what’s relevant to your financial situation. Thin cash reserves? Add more to that. Already have a healthy buffer, put the rest in the growth slice.
This is to encourage you to make a plan and, obviously, have one, before any new request, whether from a customer or vendor, comes knocking.
No plan forces you to blindly put all the money into the first thing with an “urgent” label.
Step 3: Put Growth Money Behind Where Things Get Stuck
Bottlenecks, though we’re trying to avoid using this overly buzzy word. Where is your business contending with lost time or dwindling capacity? Lost opportunities?
Now look at where the business is losing time, capacity, or opportunities.
Buy Back Your Own Time
Divide your annual income by 2,080 to get a rough hourly value for your time. If you’re spending that time on tasks someone else could handle for less, consider sending those tasks their way, and away from your “owner goals.”
Things like inbox management, scheduling, customer support, or routine bookkeeping.
Why 2,080?
From the calculation is a rough total; you have room for a bit of flexibility.
Put Better Systems Behind Manual Work
CRM setup, workflow automation, inventory tools, and scheduling software easily reduce recurring manual work. The tools. Paid tools.
Try the tool month-to-month first. See whether it’s actually useful, and only then decide whether it’s worth committing to a longer or more expensive plan.
Another “Put More Money Into What’s Working”
Because it really is a smart decision, hence the seeming redundancy of that phrase in this article. Whatever’s producing a measurable return. It’s justifiable.
New channels/sources can be tested; just bring those experiments to a minimum, and separate them from the money you’re showering on what’s already proven.
Should You Reinvest Into Your Business or Pay Yourself First?
There’s no wrong answer here since either one’s a good choice.
1. Reinvest When the Business Has Somewhere to Go
Put the money back into the company when you can point to what it should improve. More capacity. A marketing channel that’s slowly but steadily bringing in qualified leads.
Spending with purpose and results you can measure – the pair that says they’re a good use of profit.
2. Pay Yourself When the Business Doesn’t Need the Money
If there’s no immediate, high-confidence use for the profit, taking some of it out isn’t world-shattering. So can paying yourself when your own financial needs have been pushed aside to keep funding the company.
A business can turn a profit year after year and still leave its owner putting their needs last, with little to show for the long hours and sacrifices holding everything up.
There’s another piece to consider:
Roughly 88% of US millionaires are business owners, but much of that wealth is tied up in the businesses themselves rather than liquid savings.
A profitable company can increase your wealth without giving you much cash outside the company.
That’s why reinvesting and paying yourself lead to different outcomes. One puts more money into the business. The other moves some money beyond it.
Once you’ve taken money out and started building wealth outside the business, that becomes a separate investment question. Here’s a related read: How Do High Net Worth Individuals Invest?
How Much Cash Reserve Do You Need Before You Reinvest?
First, make sure you have enough cash to keep the business cruising (not merely “afloat”). You’ll want that extra cash if something unexpected bubbles up.
Financial analysts say that three to six months’ worth of operating expenses is an ideal minimum.
Small businesses may find it challenging to hit this low ceiling, and research from JPMorgan Chase Institute has the data for it:
Based on 470 million transactions from 597,000 US small businesses, they found that the median business had just 27 cash buffer days. A quarter had 13 days or fewer, while the top quarter had 62 days or more.
The numbers also vary by industry:
Work Out Your Own Number
…from the past three to six months. Find your monthly “burn rate” by averaging them, and multiplying that by the number of months you want kept in reserve.
Formula to calculate your numbers:
Cash reserve needed = Monthly burn rate × Number of months you want to keep in reserve
Two options:
- If your cash cycle is tight, build the reserve before throwing much of the profit into growth.
- If you have a healthy buffer right now, then you have wider leeway to put it towards growth priorities mentioned in Step 3 above.
Your reserve doesn’t have to earn nothing while you’re building it. You can keep some of it in short-term Treasury bills or a high-yield business savings account, depending on how quickly you may need to access the money.
Extra Read: Learn about industry tips on How to Get Rich and Wealth Building Trends for Business Owners.
The Reinvestment Business Owners Miss: Staffing Costs
Staffing is often one of the biggest expenses in a small business, but owners either don’t count it in or they believe it belongs in a different basket. It deserves as much planning as the rest because when you re-strategize how and whom to hire, you’ll be surprised at how much more you could free up.
Jobs that don’t require employees to be in the office – physically.
Bookkeeping, executive support, lead generation and follow-up, customer support, and inventory coordination can all be handled remotely in many U.S. businesses.
Every dollar you save on unnecessary local overhead is another dollar to put toward the things you identified in Steps 1 through 3. And we can help you with it.
We at Remote Staff have been supporting SMBs with their staffing needs by pairing them with outsourced professionals who offer the same quality work and talent at a friendly cost just because of geography.
You can keep staffing costs more manageable while putting money back into the business where you need it.
FAQs
Is reinvesting profit into my business tax deductible?
Yes, when the money goes toward a qualifying business expense that the IRS considers “ordinary and necessary,” such as equipment, software, wages, or marketing. Section 179 also lets many small businesses deduct the full cost of qualifying equipment in the year it’s purchased, rather than spreading the deduction over several years.
Simply leaving profit in the business account doesn’t reduce your tax bill on its own. Confirm specific purchases with a tax professional before assuming they qualify.
Does reinvesting profits help you avoid paying taxes?
Keeping the profit in the business doesn’t make the tax bill disappear. For pass-through businesses, the owners generally pay tax on their share of the business income whether they leave the money in the company or take it out.
When should I use financing instead of reinvesting profit?
Consider financing when the opportunity can generate enough return to justify the borrowing cost and waiting to accumulate the cash would mean missing the opportunity. Reinvesting profit may make more sense when you can fund the expense without putting your cash reserve under pressure.
What happens if I don’t reinvest my business profits?
Nothing happens automatically if you don’t reinvest your business profits. You can leave the money in the business, build your cash reserves, or eventually pay some of it to yourself. The question is what that money could be doing for the business instead.
Use the reinvestable-amount calculation from Step 1 to work out how much you actually have available before deciding where it should go.
Should I reinvest profit or build savings outside the business?
They’re two separate decisions, and you may choose to do one, the other, or both. Money you keep in the business can go toward growth, working capital, or cash reserves. Money you pay yourself becomes personal money that you can save or invest outside the business.
This Quarter’s Profit, Next Year’s Capacity
You’re thinking about the right thing: reinvestment. And it’ll be more of a regular decision to make than a once-a-year exercise.
If cash is low, there’s no need to rush things. Invest first in keeping the business steady and building the reserve you need. If you already have reserves at hand and a healthy amount of profit available, you’ve more room to put money into staffing, systems, marketing, or whatever is holding the business back from its next goal.
Keep checking what the business needs, where your money can do the most good, and whether the return is worth the spend. Then do it again when the next profit comes in.
Ready to delve into smarter staffing offshore? Send your questions in and Request a Callback.
Vaune Everis Cura has always been a writer in the truest sense, drawn to the art both as a personal creative pursuit and as a profession. Her experience penning content across digital marketing spaces and collaborating with business owners and market shapers has broadened her craft to include strategic direction and SEO insight. Having spent years with the InterContinental Hotels Group before stepping boldly into freelancing, she understands that at the centre of it all are genuine, meaningful brand–customer relationships built on purposeful, human content.
