How much should you be reinvesting back to your business? (You might be surprised)

You’ve made the leap, business is rolling in and one of the first questions usually is - “How much should I be spending on things like my website, advertising, social media, hiring experts, etc.? And also, when should I start doing that? At the beginning? After I have revenue? Take a loan?  Use my savings? How do I know if I should do any of that?”  

The questions when you’re starting your business can be endless and you’re sure to get tons of expert advice (please allow me to roll my eyes) from those who have never actually faced the feat of opening a new business and had to come out on the other side paying the bills and sleeping at night.

Unfortunately, this answer isn’t as clear cut as you’d like it to be, but I do have a few guidelines and basic rules when it comes to investing into your business that I’d love to share with you!

Keep reading for my top 3 tips and guidelines when it comes to reinvesting to your business.

The very first thing to realize is that there’s best practices to follow for everything when it comes to your business finances that will help you dictate and answer these questions for your business and you. And secondly, exactly that second part. Just like personal finance, there’s no one size fits all answer. The right answer might vary based on your goals, your business model and your strategic plan.

Understanding your options is one of the best things you can do and in this article, I want to help you understand a little more about what to expect when it comes to revinesting into your business and what it really means.

What does ‘Revinesting Into My Business’ actually mean?

When you’re making a choice to reinvest profits into your business, you’re making a choice to not take home money on purpose, or purposefully stow it into a business savings account for a rainy day, so that you can buy, hire or do A, B or C.

What you’re really doing, is effectively exchanging profits for business expenses. When you reinvest profits or ‘plowback’ profits, it’s no longer a profit, it’s now an expense.

And it’s not always a bad thing, sometimes it’s necessary in a growth period. But if you’re not careful about understanding how much actually is profit and how you got there, reinvesting profits can often become a dangerous and vicious cycle that can break you and mess with your cash flow.

Here are the top 3 questions you can ask yourself when you’re facing this question, ‘should you reinvest your profits?’.

Question 1:  Is your business actually making money yet?

Do you have customers, clients, sales and revenue coming in or are you still waiting on that pivotal and unforgettable moment?

If you’re just starting up, you’re likely pretty antsy and excited about that first sale, but it seems like you need to have all the bells and whistles in place first before it becomes a reality, right?

My general rule of thumb is that if you don’t have sales, DIY or trade services for everything you possibly can to get to that point.  This isn’t even revinesting - this is simply investing into your business from an owners viewpoint. (And side note: Make sure when investing into your business from personal funds that you track it as such so that you don’t pay taxes on that money when you pay it back).

We think we need all these things to start our business, but the truth is, what a business needs is cash.  It’s critical that you spend more time acting like a business than you do looking like a business and this is one of the first mistakes I often catch new business owners making.

There are so many incredible tutorials on the internet (YouTube especially!), books and courses you can take to teach yourself how to do virtually anything you need to! And there are a lot of great completely free resources out there to get started with before you increase your expenses.

If it’s too far out of your comfort zone to DIY, try to come up with at least 5 alternatives that can help you minimize the cost. Is someone willing to barter or trade services? Is there someone who’s starting up and will do it for less or exchange for testimonials and feedback? Someone looking for experience? And then take some time to review your options and costs.

I always tell new business owners that your dream, vision and business will change so much over the course of the first year or two, that it’s important that you don’t overspend on things that won’t matter down the road or that you know you’ll want to redo eventually.

If you decide to make an initial investment into your business, you’re not in crazy land. Just ensure that it makes sense from a personal finance point of view. Meaning, ensure that first, it’s definitely extra money you’ve saved for this purpose, not your emergency fund savings or retirement savings. And two, be sure to put a number on it, move it to your new business account so that it doesn’t get confused, and third, log the investment as an owner investment and create a plan for that money. The first money you’re looking to spend is on ROI expenses. More on that below.

Question 2: Can you pinpoint the ROI on the investment?

Figuring out the ROI is pretty simple. The basic formula is: the increase in revenue due to the investment, minus the investment, divided by the investment, times 100.

So, let me simplify that with an example: You invest in a sales coach that increases your close rate by 60%, generating an additional $3,000 in revenue monthly. That investment cost you $1,000. $3000-$1000 = $2,000/$1000 = 2 x 100 = 200% ROI - not bad! There won’t always be a direct dollar ROI, but when the budget is tight, it’s important to understand what the return WILL be to help you decide if it’s a cost worth pursuing at this time.

Now, what’s important to recognize as well, is that return on investment in this case isn’t the only thing to look at. I also like to suggest you look at what the investment needs to generate for you to actually fit into your expense budget and how long will it take for you to break even.

For most small businesses (under approximately $250K), it’s suggested to operate on approximately 30% of your real revenue for business expenses. The rest is for taxes, margin, and paying yourself. So in this example, that $1,000 expense needs to generate $3,330. In that case, you’re pretty close to one month until you break even. It’s still a really great investment!

If that expense was more like $5,000, it would actually need to generate $16,600. So if it’s increasing your revenue by $3,000, it’s just over 5 months until you break even. Still not bad, but always be looking at it from a few different angles on the revenue, ROI and expenses.

Asking yourself questions like these from a few different angles will help to keep you from making a purely emotional decision vs. one based on facts and numbers.

Another thing I like to look at when it comes to an investment into the business (and this isn’t just if you’re new), is, ‘Is this a revenue generating expense’? Meaning, if I purchase this product or service, can it directly help me increase my revenue?

You’ll be making a lot of different types of investments into your business growth over the years and this is a great question to assess with the ROI numbers to help keep you aligned with your goals and maintaining profitability. I find a lot of the time that people invest into things they don’t actually need, well before they need it to fit the ‘look’. The ‘look’, doesn’t pay the bills.

Question 3: How much additional revenue and profit can you make with the time you save in the investment?

I never recommend business owners charge by the hour, but that doesn’t mean you shouldn’t know how much your hourly rate is.

Remember, your time isn’t just client facetime, but it’s also experience, value, behind the scenes work, other experts you might bring in, etc.

When you know your hourly rate, it’s a little easier to make a comparison of should you outsource because you can make more directly gaining or working with a client or should you invest time and/or money into a coach or course to teach you how to do the work yourself.

This investment doesn’t just have to be outsourcing to hire. This might be your time and financial investment into a course to increase your value and skills. It might be investment into a system where you can use the hourly rate vs. the cost of the system to figure out your breakeven timeline.

And maybe it’s not outsourcing something for business, but something else personal to open up that time. Can you outsource cleaning your house, running errands, grocery shopping, household management or something else that opens up several hours in your days and/or week to spend on work where you make more (and maybe enjoy the task more too).

Asking yourself these questions before reinvesting to your business can help you avoid making costly mistakes. Have you ever heard of the small business owner who made $10,000 in one month and spent $12,000? It happens every single day.

When you know your numbers, and remove the emotion from the equation, you can make more informed decisions to help you make not just more revenue, but more profit.

I’ll leave you with one of my favorite pieces of advice to give an owner who struggles with this dilemma of ‘should I reinvest or not’ or doesn’t know where to draw the line. Open an additional bank account just for investing into your business. It might be personal development, it might be hiring, or maybe you don’t know what it’s for - just call it, growth account. Put a certain percentage into it with every bit of income you get in, and when you have enough for ‘that thing’ you’re thinking about or the perfect opportunity arises, you’re ready to jump on it!

Kristen is a Certified Profit First Coach and Personal Finance Coach who specializes in working with small business owners & entrepreneurs in both their business and their personal lives to maximize their financial capabilities and future. To learn more about Profit First & business financial coaching options, click here.