After getting your business off the ground, it’s a hugely rewarding moment to witness the profits start to roll in. But this also raises the question: what to do with the profits?
Lucy Jeffrey, owner of bamboo sock retailer Barekind, promised herself that she wouldn't take any money out of her business until Barekind was “a global business operating in multiple continents”. Once she hit that milestone in 2022, she started paying herself a small salary. Apart from this, she does not take any other cash out of the business, instead reinvesting all profits into growth.
“We’ve had really ambitious growth plans from day one, and we took external funding to help with those plans," she says. "But we are now in a position where we have profits we can invest, without the need to take on debt or external investment.
"We could take a profit, or I could take a higher salary. But my goal isn’t to build a £5 million business, it’s to build a £20m+ business.”
If you want to accelerate your company’s growth, the expert advice is to invest as much surplus profit as possible back into your business. In this article, we’ll share five smart ways to do this.
Why should you invest your business profits?
By reinvesting profits into your business, you could:
- Increase production capacity.
- Invest in systems and technology to improve efficiency.
- Recruit and retain more skilled employees.
- Expand your business into new markets.
- Increase your product range.
- Drive growth by investing in sales and marketing.
“It all comes down to what your goals are for the business,” says Ceri Gillet, a business advisor at Mubu, a social enterprise that supports entrepreneurs and start-up businesses. “What are you trying to achieve right now? That’s where the money should go, to give you the biggest chance of achieving that goal.”
If your goal is to grow your business, then investing in new equipment or machinery might allow you to take on more business, more quickly. Profits can be used to increase your workforce or offer higher salaries to recruit more skilled and experienced people, or increase productivity. Investing in technology can help to drive automation and efficiency, which could reduce your costs and improve profit margins.
How much profit do you have to invest?
Each quarter, Jeffrey sits down with her financial planner to review the accounts. This includes looking at annual and forecast P&L figures to identify what profit the business has made and will make for the next two years.
“Because we’re using profit forecasts, the numbers aren’t ever a guarantee, but it helps us to identify our priorities and plan budgets for how investment will be used," she says.
When looking at profits, Gillet advises businesses to retain a buffer that will cover 12-18 months of operating costs. This will protect your business in the event of an unexpected downturn or change in trading conditions. “The exact buffer you need will depend on your business," she says. "If your trading activity is very steady and your operating costs are quite low, then you might be prepared to take a risk and invest more profits.”
Smart ways to invest business profits
Paying down debt
“I meet so many owners who are petrified of debt, but it isn’t necessarily a bad thing,” says Gillet. “The important thing to consider isn’t whether you have debt but how that debt is managed.”
If your business is steady and the debt is relatively inexpensive, then it might not be your top priority for investment. However, if your business is more ‘feast and famine’ and you struggle to manage debt during slow trading periods, then it makes sense to pay off the debt more quickly. “[In doing so] you’re reducing your monthly operating costs, freeing up more capital, and helping to build business resilience,” says Gillet.
One potential backup plan can be to apply for a Charge Card. They are a great option for businesses looking to remain interest and credit free, while giving you more wiggle room on your balance sheet.
If paying down debt isn't an option just yet, an alternative way to free up capital is to use the American Express® Business Gold Card for business expenses. You get up to 54 days¹ until payment is due, giving you more time to balance your incoming and outgoings, and maximising your cashflow².
Invest in expansion
If your business plan identifies expansion as a goal, then investing to support growth could be a good option.
Jeffrey has consistently invested in growth, including geographical expansion. The company is planning to open a US warehouse centre in 2023, using profits from the business. “We know from our website that there is demand for the product from the US, but it’s slow and expensive for us to ship there. If we can get a US warehouse, and have stock split between Europe and the US, that gives us a better platform to grow those markets,” she says. The company is also investing in new product lines, which Jeffrey hopes will broaden the customer base.
Pay a bonus
With many businesses struggling to recruit and retain staff, it could be worth considering using profits to reward your current employees. Paying a bonus or adding a profit share scheme can help to improve employee retention, as well as making your business an attractive employer to new workers.
“Investing in people is also one of the best ways to drive growth,” adds Gillet. “Hiring a new employee tends to cost six to nine months of a departing employee’s salary on average, so paying bonuses to retain people makes a lot of sense.” You could pay a straightforward cash bonus, but you might also offer employees better perks, or offer them the opportunity to use a workplace budget to fund training and development.
An alternative to a cash bonus is to use American Express Membership Rewards® points to reward employees. Each £1 you spend earns you 1 Membership Rewards point that you can redeem with hundreds of retailers on items such as office supplies, IT equipment or employee perks³.
Invest in outsourcing
As your business grows, it makes sense to focus your time on areas where you add the most value. In most cases, that’s unlikely to be back-office administrative functions like payroll or accounting. If your expertise is in building car accessories, does it make sense to free up time and resources by paying someone else to run your marketing activities?
Investing in outsourcing will generally deliver cost-savings in the medium-term because a company that only provides payroll and account service will be more cost-effective than a company running an in-house accounting department. This could free up more working capital to fund growth in the future.
Save and protect
While it's beneficial to invest business profits, retaining a safety buffer of surplus cash is also important to ensure that if unexpected things happen, you can pay your staff and cover basic costs like premises and equipment, Jeffrey adds. “We are very conscious that we have employees and so we wouldn’t invest without ensuring we have the working capital available to cover those costs,” she says.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
2. If you'd prefer a Card with no annual fee, rewards, or other features, an alternative option is available – the Business Basic Card.
3. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
