Should You Save, Invest, or Reinvest Your Business Profits?
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Congratulations! Now that your startup business is making a profit, it only means your business is thriving. While this calls for a celebration, there are more important things you need to take care of now that you are finally enjoying the fruits of your labor. This includes deciding on how to make the best use of your hard-earned cash.
Entrepreneurs have many options when it comes to using their profits. Should you save it or would it be a better idea to invest it into something that can yield a higher value? Would you rather reinvest it back to your business?
For the best results, you will want to use it for something that will benefit your business in the long run. How can one decide where to use their business profits? One way to determine how to best make use of your cash inflows to take a step back and assess your business goals and current company needs. Answering the following questions will help you decide whether to save, invest, or reinvest your profit.
Do You Already Have an Emergency Fund Set up for Your Business?
If your answer is no, then you might want to consider saving your profit to build an adequate rainy-day fund. According to a study, about 82% of companies fail because of poor cash flow management. If you have more than enough cash to pay for your business expenses and more to save an emergency fund, you will have better peace of mind.
You can use your business savings to cover unforeseen expenses such as a slowdown in revenue, unexpected equipment damage, or immediate professional service fees. For startups, your business emergency fund should be able to cover at least three to six months’ worth of your business expenses. This way, there is no need to apply for a business loan or use your own money to cover for emergency business costs.
Is Your Business in Need of Improvements?
There are many ways to improve a business. For instance, you can upgrade your equipment or boost your marketing. It can also mean investing your profit to improve the safety of your building and boost the peace of mind of your workers and your customers. Sometimes, business owners would cheap out on important improvements just to save some cash. But if you want to better secure your brand, you will make certain improvements to avoid future legal hassles.
Let’s say you are running your business in an old building. You will want to make sure it is still safe for you to run your business in the building. You can consider investing in an early inspection to make sure your building complies with your city’s building codes. If you follow fire prevention tips to avoid a fire in your home, you will want to do the same and more to better safeguard your business from any potential but avoidable threat.
According to statistics, 70% of small business owners carry an outstanding debt. If you have business debts, you can choose to start paying down your lenders. Doing so allows you to improve your company’s financial health and save money by paying down a bigger amount towards your principal balance. In turn, you get to raise your credit score, increasing the creditworthiness of your business. Having a good business credit score allows you to enjoy more favorable terms from both future lenders and suppliers.
Should You Start Diversifying Your Portfolio?
Business owners and entrepreneurs are always on the lookout for other ways to increase the value of their profit. It may seem like a good idea to start reinvesting your profit in other investments. But if your business is still in its infancy stage, then you might want to save the extra money instead and use it to improve and grow your brand. Once you learn about other investments and gain the necessary skills, you can then start to diversify your business portfolio.
Sometimes, entrepreneurs would immediately jump on the diversification wagon. You may be enticed to start investing in bonds or even the stock market right after making some profit. If this is something you are keen on doing, consider starting with investments that have smaller risks. You may enjoy smaller returns but then, you can avoid the heartache and financial headache that comes with bigger losses.
Answering these three questions can help you realize what your immediate business needs are. These will also help you turn to your original business goals, tick the items you already managed to accomplish and create new objectives for your business. The decision on how to use your profits lies in your hands. But taking time to consider all options, check your business needs and goals can help you decide where you can make the best use of your cash inflows.