Q: What should I think about when choosing how to reinvest the profits from my business?
A: Firstly, ask if it makes sense to reinvest in your business. Many businesses focus hard to be/stay profitable. They can run the risk of automatically assuming that all profits must go directly back into the business, but this isn't always the best investment decision.
Think about what lifestage your business is at, whether it has a current need for more capital to sustain its future operational profits, or whether you have new profitable growth opportunities that require investment to realise them.
Assuming you own the business, your decision to reinvest should also be guided by your circumstances and what you want out of the business over time.
Ideally you would have at least one independent director that you can work with to help assess and guide decisions that best balance the needs of the company with your needs as the shareholder.
If you can see either a need or an opportunity to reinvest your profits then spend some time defining these in more detail, and treat each to a business case to help assess them. This will allow you to objectively and rationally assess investment options and make decisions.
Business owners can make the mistake of considering their retained profits as cash for spending, but like any finite resource there is an opportunity cost to pushing the extra cash back into the business.
A business case should need to reach a minimum return to be considered a viable investment option. Carefully consider the risks and returns so you can discount out the options with either too low a return or too much risk.
Weigh up the options based on these criteria. Get team members' input and involvement where appropriate and get help from your accountant or financial advisor if you need a framework and tools for business case work.
Finally, if you do decide to reinvest then actively monitor and manage the investment to best ensure the prospect of a great return. Consider staging the investment where you can, track the investment to definitive outcomes and actual returns as these are realised and continue to consider the investment as you go.
And remember, it's your business and your money. Roll around in it a bit before reinvesting.
- Steve O'Connor is the CEO of Creative HQ, Wellington's startup incubator and entrepreneurship hub
A: Balance both your long term goals (shareholder and personal) with what would a third party non emotional investor would choose. If the investment is significant, you should prepare a formal business case as if you had to justify the investment to a third party such as your bank.
Too often businesses do not balance out their investments in regards to strategy, marketing, product development and delivery.
I would explore investing in stuff that will de-risk your business and generate more future revenue.
You need to be clear that there is a long term need for your product/service and how you are positioned to leverage it. Most NZ businesses have poor marketing and could benefit from investment in this area.
Do not forget to consider a dividend for you as shareholder or a staff bonus in the mix.
- Mark Robotham is an SME business adviser. Website: growthmanagement.co.nz
- If you want to ask our experts a question, please email firstname.lastname@example.org