Accounting & Finance
How to handle small business profits
If you’re managing your own small business, you might think that how to handle your profits is the least of your worries. The object of the business is to make a profit, and once you’re doing that reliably, it will all be plain sailing, right?
Well, yes and no. Of course, you are in business to make a profit, and the vast majority of your efforts will go towards achieving this. However, what you do with those profits in some ways can be just as crucial. Reinvesting the money that you make can help your business to grow, but you need to consider carefully just how you reinvest that money – and just how much you put back in. The fact is, business profits can swiftly disappear if squandered on ill-conceived ventures, and a seemingly successful business could flounder and even collapse if the profits are not handled correctly.
What do you want from your business?
The nature of your business and your long-term goals will affect any decision that you make as to how to handle your profits. Do you want your business to keep on growing and becoming bigger, or do you just want it to stay at a level where you’re making a modest income? If you work from home as a sole trader, then you certainly have less pressure to reinvest than if you have premises, employees, and even shareholders to think about.
Another question to ask yourself is whether you enjoy doing the work for its own sake or whether your long-term goal is to eventually be able to work less? At this stage, it’s worth mentioning that you should have a comprehensive business plan in place. This should not only cover budgeting and expenses but also a picture of your business’s long-term goals and a strategy and timescale to achieve them.
If you want your business to keep on growing, you need to reinvest more of your profits than if you’re happy keeping it small scale or even envisage yourself winding it up or selling it on at some point.
How much should you reinvest?
The answer to this question depends on your answer to the one above, but also on what your expenses are. If you work from home running an online business with minimal overheads and no employees, then reinvesting 10% of your profits should be enough. In other cases, you might want to plough up to 50% of your profits back into the business. Ultimately, there’s no hard and fast rule: you know your own circumstances and hopefully have an idea of the capital needed to achieve your ambitions.
In what areas should profits be reinvested?
You might want to invest some of your profits into buying new equipment or IT/software that will make business admin easier. Another obvious avenue is advertising and promotion. Taking courses of study or attending conferences can also help your business. You might also want to consider moving to bigger/better premises, taking on new employees, or even buying other businesses.
One word of caution is to keep an eye on your Return on Investment (ROI). There’s no point in pouring money into a seemingly bottomless hole that doesn’t seem to be generating income for your business. Remember, you should be spending money to make money, not just as a tax loss.
What if I don’t want to reinvest?
There are several good alternatives to reinvesting your profits. If you just want to hang on to them for a rainy day, then you should look for a good savings account with a competitive interest rate and no charges or minimum balance requirements; you can learn more by visiting websites that offer a variety of savings accounts. You might also want to invest in stocks and shares to build up a second passive income stream. In this case though, remember that the value of stocks can go up as well as down. A long-term mixed portfolio is the best way to reduce risks, especially if you don’t want to spend time and effort watching the stock market and buying and selling.
What are my other options?
There are good reasons why you might want to pass on a share of your profits to your employees. As well as being a fairer way of doing things, it will make them more likely to work hard if they feel that they have a stake in the business’s success. Morale and team spirit will generally improve. There are different ways to do this: you could offer end-of-year performance bonuses, or restructure the business as a co-operative where your employees are also shareholders who have a say in how the business is run, and can expect a dividend payment when things are going well.
Deciding how to handle profits is an important part of managing a small business. Do it right and you could find that you’re soon doing better than you ever expected.