Once your business starts making a profit, you will need to think of ways on how to make the best use of your earnings. If you already have an adequate rainy day fund and you’ve been paying yourself since day one, your other two options include reinvesting your profit or pay off any business debt you may have. To reinvest money back to your business is to spend more money to facilitate your company’s growing needs. Paying off your debt can also be a great idea if you acquired debt to fund your company. But how can one decide between the two options?
Answering the following questions will give you an idea of what you can do with your business profit.
Does Your Business Have Immediate Business Needs
Reinvesting your profit back to your business is a good idea if there is an immediate need that needs to be filled. For instance, your company is in the process of scaling up and you already accepted more orders than usual. In order not to disappoint your customers, you will need your workers to work double-time and meet your quota before the deadline.
Since you’re still scaling up, you might need to hire a couple of new employees. You might also consider outsourcing some tasks or buy new materials and equipment. This means you will need more funds to pay your new employees, outsourced workers, or the brand-new equipment.
If your business has immediate business needs, you must consider reinvesting. This way, you don’t need to use up your company’s emergency fund. You can keep up with your client’s demands and still make a profit. Of course, you will need to assess how much money you can realistically invest back in the company.
Do You Have a High-interest Debt?
Business owners use different methods to finance their startup. You can raise money through crowdfunding or by asking loved ones to be your creditor. Some managed to find themselves an angel investor. Others apply for a bank loan, through a Small Business Administration program or by applying for a microloan. There are also times when some people choose home loans to tap into their home equity and use the funds to start their business.
No matter the kind of business debt you have, it only makes sense that you start paying them off at the soonest time possible. But since business owners need to focus on return on investment, it can be difficult to decide whether you should pay down your debt first or use your extra cash to grow your business. One way to settle this is to check what kind of business debt you currently have. Do you have high-interest debts and you’re struggling with your monthly dues? Then it would be best to focus on reducing your debt first to avoid your business from drowning in more debt.
Can You Reinvest and Pay Debt at the Same Time?
If your business is consistently earning more than your expenses, then it would be wise to do both. Create a budget so you can address both your debt and business needs. This way, you can give equal importance to both areas. This won’t be easy. But with a bit of planning, it is also not an impossible thing to do.
One way to do this is to find a balance between reinvesting and paying off your debt. First, you will want to create a new business budget wherein you can reduce some of your expenses without sacrificing business efficiency.
Create a debt-reduction strategy. Ask your accountant for help. They can give you the best advice when it comes to controlling your spending, prioritizing debts, and dealing with loan repayments.
As for reinvesting back to your business, find ways you can increase your income. Consider up-selling and cross-selling your products, attracting new clients, or creating new products out of existing inventory and equipment. Instead of hiring many new employees, you can consider giving your current staff incentives in exchange for their longer working hours and only hire a few recruits. This way, you don’t need to hire and train lots of new employees or outsource some tasks for a long period.
Budget for both your debt and business reinvestment. It may feel like it takes long before you meet your business goals. But this will allow you to still invest in your brand while keeping up with your high-interest debt payment.
It is never easy to decide between using your profit to pay off debt or to reinvest it back to your company. Weighing the pros and cons of each will give you a better idea of what to prioritize. But if you want a smart solution, you can consider doing both. This way, you can still reinvest in your brand without neglecting your business debt.