If you’ve been in business a while and are beginning to see a steady profit, it may be tempting to think you can now sit back and coast for a while. Don’t fall for that.          

Your real work has just begun. In a world where markets and business conditions are constantly changing, you always have to be prepared for the unexpected. And one important way to do so is to reinvest in your business – don’t just pull all the profit out.

But how much should you be putting back in?  

Some people think it’s as simple as picking a flat number – 6 percent, 10 percent, maybe even 20 percent of your business income – and rolling it back into the company. But to small-business consultant Richard Weinberger, “that’s kind of shooting from the hip.”

Weinberger, based in Austin, Texas, is chief executive officer for the Association of Accredited Small Business Consultants. His consulting work grew out of nearly two decades of practice as a certified public accountant as well as years of teaching at the college level. He’s also the author of AAMP Approach: Accelerated Action to Maximize Profit, a book published last year by the association. Weinberger describes the book as a roadmap to small-business success.

On the subject of reinvesting, there’s no one-size-fits-all answer.      

“Without a certain amount of analysis that is really important, it is not possible to say how much money or what percent of profits one should reinvest in one’s business,” he says. “There are too many variables that affect that decision.”

 

Factors to Consider

The No. 1 variable is where your business stands in its life cycle: Is it a startup? On a growth streak? Maturing and stable? Or perhaps in decline and in need of a turnaround? Each stage requires its own careful consideration when it comes to reinvestment.          

Another variable is your competition. Are you really the only game in town for the services you deliver? Or do you have to scrap for every account you land and sale you make?  

Then there’s the size of your business. “A larger, more profitable company can afford to invest more dollars – which equates to a lower percentage,” Weinberger points out. Think about it. If you’ve decided you need to put $500 a week back into the business and you’re making $1,000 a week in profits, that’s 50 percent; if you’re making $10,000 a week, it’s only 5 percent.

Even the first question — what stage your business is in — has more layers to it. You’re growing, but what does that mean in detail? Are you planning to add new products or services? Have you decided you need a capital expansion — more equipment, a bigger shop, or both?

The First Steps

Weinberger says deciding how much to reinvest doesn’t come until after some serious analysis.          

“A small business must develop a strategic plan for growth with realistic, achievable goals,” he says. Strategic planning isn’t just for big business – although it might sound that way. “Many small businesses fail, or don’t prosper, because they really don’t have a plan as to where they’re going.”          

Consider what niche you think you can best fill in the marketplace. Is it your intention to be the low-cost provider? Or perhaps a premium-price provider with a sterling reputation for the highest quality services and products available? Is there a narrow market niche you want to focus on?

 

SWOT and Cash Flow

Two important tools as you formulate your plan are a SWOT analysis and a cash-flow forecast.        

SWOT is an acronym for “Strengths, Weaknesses, Opportunities and Threats.” What is your operation good at? What must you do better – or get out of entirely? What is coming up that represents a new source of business? What’s lurking that could throw you off your particular trajectory?        

The cash-flow budget, meanwhile, looks not just at how much money you’re taking in, but how much is going out – and how fast.  

“A profitable company can have serious cash-flow problems,” Weinberger points out – making money on paper, but falling deeper into debt because receipts aren’t coming in on a timely basis.          

Comparing patterns of income and expenses over the previous few years, the cash-flow budget projects month-to-month ups and downs in your income in the year – or even years – to come, showing how much cash you have when the bills come in.

 

Drawing the Picture

These tools can help you discover trends that help you improve the business. What service or product has the highest profit margins? How much of your time and income actually come from that segment? Perhaps you can expand in that particular service or product and boost your profits.

By identifying strengths and opportunities to build on, as well as weaknesses and threats you need to counter, goals and objectives begin to take shape. Once you have a clearly defined target to aim for, “then the business has to say, ‘OK, what is necessary to achieve those goals and objectives?’ ” Weinberger says. “What is it going to take them to get from Point A to Point B?”        

What sort of marketing campaign do they point to? What sort of skilled labor is needed? Will you need to expand the physical plant? Will your employees need special training to enter a particular new market segment?    

Only then, says Weinberger, can you come back to the question of how much to reinvest.      

For two different businesses, he explains, “If their goals or plans for the future are different, then the amount they reinvest is going to be different also. The profit to be reinvested is really all based on what is needed to achieve the strategic plan.”

 

Three More Things

If your profits are large enough to make that monthly reinvestment amount affordable, great. But if they aren’t, you’ll need to do at least one, and probably all, of the following: rethink your strategy, look for ways to boost profits and cut costs.

Weinberger says his book focuses on how to expand by generating internal business growth so that you don’t have to reinvest profits. But whether you are able to simply generate internal growth immediately, or you must continue to reinvest for the time being, a sound analysis beats simply picking a flat percentage of your profits, he believes.        

That may be a lot more complicated and take a bit more time. But when the future of your business is at stake, it will be time well spent.    

You could even consider it an investment.