It’s always a tough decision when you’re faced with the choice of reinvesting your hard-earned money back into the business or giving yourself a well-deserved bonus. On the one hand, you want to ensure that your business has the resources it needs to continue growing and achieving success. On the other hand, you’ve been the one steering the ship and taking risks – surely you deserve a financial reward for all your efforts!
So first things first, before you spend money on yourself or your employees, let’s make sure you have the money to spend in the first place. Here is a short list of some essentials you should have taken care of before you cut yourself a check or reinvest in your business:
- Business Expenses: Make sure you have enough capital to cover short-term and long-term expenses.
- Personal Expenses: At this point, you likely are paying yourself either through owner withdrawals or a salary. Whichever way, make sure this is a substantial amount to cover your personal needs like your mortgage, car, and monthly bills. Believe me, if you’re still living on ramen and stressing about making it month to month, you’re not doing the business any favors. Pay yourself appropriately.
- Healthy Cash Reserve. How much cash does your business currently have on hand? How much do you anticipate you’ll need in the next few months or years? Enough business cash on hand for emergencies or unexpected financial hits like losing a high-level client is essential for future-proofing your business.
Now, after you’ve calculated your profit margins, let’s dive into what you should do with the residuals: reinvest vs. paying yourself more.
Reinvesting In Your Business:
If you choose to reinvest your profits back into the business, you’re essentially ensuring that your business has the resources it needs to continue operating and growing. Let’s look at a few ways to achieve this:
- Increasing your employee’s wages or giving a bonus. It’s always a good idea to invest in your staff, so make sure you are offering competitive pay for the work being done. But a word of caution. What you may think is a positive reward for your team’s hard work may have a negative impact, as shown in research conducted by Harvard Business Review. Reinvesting in your staff is essential, but make sure you do so with the right strategy.
- Recruit additional members. When you’re well staffed, it increases employee engagement by alleviating some of the stress and workload. Not to mention, it allows you to cultivate a positive work culture. Things as simple as allowing more freedom with PTO can go a long way.
- Expand Benefits. Consider improving benefits to increase employee satisfaction.
- Increase Assets. Adding new equipment, facilities, or anything else that can help you scale your business to meet the needs of your business.
However, it’s important to remember there are no guarantees in the business – even if you reinvest your profits, there are no promises that you’ll see the same return on investment depending. There is also the potential opportunity cost to consider – if you choose to reinvest your profits, you may miss out on other opportunities (such as investing in another business).
Paying Yourself More:
On the other hand, if you choose to pay yourself more, this essentially means that you’re giving yourself a well-deserved raise or bonus. And let’s be honest – you deserve it! After all, you’ve taken on all the risk and put in all the hours to get your business where it is today. Some ways to do this include:
- Increasing your salary or owner’s draw. This is the most direct way of giving yourself a raise, and it can be done as often as you’d like. Just remember to take taxes into consideration!
- Give yourself a bonus. This can be a lump sum payment or given periodically (such as quarterly or annually). Like with wages, make sure to take taxes into account.
But keep in mind, if you’re purchasing your second home, or driving a luxury vehicle while your staff is underpaid, then this is probably not the best idea and could drum up resentment amongst employees.
So what’s the right decision? The short answer: It depends. There are many factors that are specific to you and your business. Here are five factors you should consider on how to allocate profits from your business venture.
5 Factors To Help You Allocate Your Profits
1. The Stage of Your Business
The first question you should ask yourself is what stage is your business in?
If you’re a start-up with just a few years under your belt, then you’ll likely want to reinvest a more significant percentage of the proceeds back into the business to help it scale to the next level. Doubling down on things like your marketing efforts, customer engagement, and improving the efficiency of your business processes will likely see a high level of return on your efforts.
On the other hand, if your business is more established, you may have more leeway to take some money off the table for yourself. This is especially true if your business is cash flow positive and you’re starting to see consistent profits month-over-month.
Keep in mind that even if your business is more established, there’s still no guarantee that reinvesting profits will continue to grow your business at the same rate – it depends on the industry you’re in and the current market conditions. All success plateaus eventually.
2. Your Current Pay Structure Of Your Employees
Are your employees already paid slightly above average for the industry? Or are you just meeting the market value?
If you’re already paying your employees well, then it may not be as big of a deal to make some money out for yourself. However, if you’re only paying your employees the bare minimum, then you may want to think twice about taking any profits out of the company. Your employees are the backbone of your business, and if they feel like they’re being undervalued, it could lead to high turnover or low morale.
Investing in your employees can come in many forms – from providing them with additional training or education opportunities to offering more competitive salaries and benefits packages. By reinvesting in your employees, you’ll not only improve employee retention and satisfaction, but you’ll also make your business more productive and successful overall.
3. Determine What Additional Resources Would Do For Your Company
It’s important to address your progress and benchmark it against your quarterly and yearly business goals. Are you already meeting those goals with your current resources? Or will increasing your resources help you reach those goals faster?
If it’s the latter, then reinvesting profits back into your business may be the right answer for now.
4. The Health of the Economy
It’s important to understand what kind of environment you’re business is in. Are we in a recession, or is it a booming market? The answer to this question will help you make payroll decisions.
In a downturned economy, it might be a good idea to keep more cash on hand in case your business needs it to weather the storm. If things are looking up, you may have more wiggle room to reinvest in the company or pay yourself more.
However, if your business is doing well despite an economic decline, then it’s a clear sign that you’re running a tight ship and could afford to give yourself (and employees) a raise without putting too much strain on the business.
5. What Are Your Competitors Doing?
Competitors always keep us on our toes. It’s what pushes progression to the unthinkable. So if you’re looking to take home a massive payday, think about where your company is positioned within the industry. If you’re far ahead of the herd, then your business may not warrant a considerable reinvestment at the moment. But if you’re in a tight race, taking a step back may leave you falling behind in the future.
So there you have it – five factors to consider when allocating your business profits between reinvesting in the company or taking some money off the table for yourself. Weigh out each option carefully and make the decision that is best for you and your business. And don’t forget, you don’t need to strictly put your money in one or the other- a good entrepreneur knows how to balance both.
This guest post was authored by Samantha Brandon
Samantha Brandon is a pharmacist, mother of two toddlers, and online entrepreneur who is passionate about giving women entrepreneurs the tools they need to succeed at SamanthaBrandon.com.
Ms. Career Girl strives to provide valuable insights you can use. To see more from our columnists and guest authors, check these out! Or subscribe to our weekly email featuring our latest articles. We’re also present on Medium!