Running a business to the point it begins to generate profits on a consistent basis is up there among the most difficult aspects of running a business. For those who have achieved success at running a profitable business, it becomes even more important to use those profits wisely. A lack of solid judgement about the best way to use profits could drive a business right back into unprofitable zones.
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There are usually two options regarding how to use profits. First, you could distribute the profit among owners – or take it all alone if you own the entirety of the business. The second option is to reinvest the profit back into the business to drive up the growth of the business – an option that could improve the chances of the business earning more profit over the next year.
The most rational option would be to reinvest the profit back into the business to drive growth. However, if you have investors in the business, it might be infeasible to reinvest 100% of the profit. They would want something in return for their investment. After all, they’re invested in your company to earn a return on investment.
If you’re a good communicator, though, you might be able to convince the investors to defer receiving bonuses until another year, especially if there’s an opportunity in your market that you’re well positioned to capture. In any case, it is never a wise decision to distribute the entirety of your business’s profit among investors. At most, you should give them only tiny percentage of the profit.
So since you’ll always have to reinvest most of your profit, here are some options to consider.Invest in employees
Regardless of how solid your business strategy and model are, your chances of achieving profitability in your business becomes drastically reduced if your employees wouldn’t work hard to ensure the success of a business.
Therefore, it makes sense to think of your employers as the first asset you should reinvest your profit in. A study conducted
by economists at the University of Warwick gathered that employees’ productivity
increase by 12% when they are happy.
While the study said money wasn’t the only driver, you need to know that it is fundamental. The study makes a case for why it is important for a company to encourage healthy relationships with and among employees.
Still, though, the companies whose employees are happy hence, driving productivity north tend to be companies that pay employees well already. For instance, the study referenced that Google saw its employee productivity rise by 37% as a result of investing in employee support.
The point here is that you need to invest generally in making your employees happy. Creating a lively working environment as well has handing out bonuses would help a great deal.
Making this kind of investment will dramatically increase the chances of achieving success with any other form of business investment you make.Invest in Infrastructure
Businesses that expand typically invest in infrastructure
and operations. Reinvesting profits in infrastructure makes it possible to capture new market opportunities that could make the business bigger and more profitable.
However, before making any infrastructural investment you need to be able to qualify and quantify the potential return that such infrastructure will bring to your business. As a small business, you only want to invest in infrastructures that are essential for you to make your business bigger – just the infrastructures that that promise the highest return.
Buy a competing small businessInvest in financial markets
Admittedly, this is not a conventional way to reinvest profits. However, there are certain circumstances under which it could make sense for businesses to put money into the financial markets. For instance, if the business environment doesn’t encourage new business investments, it might make sense to invest in financial asset, according to Starling Capital
An example of a business environment that doesn’t encourage new business investment is the oil business. As you probably already know, the price of crude oil has fallen by around 66% from its 2014 highs
. Such price doesn’t encourage new business investment and oil companies are cutting down new investments and business costs – and rightfully so.
So if you find yourself in a struggling industry, instead of losing money by investing more than its reasonable, you could invest in the financial markets to leverage your business. When investing in financial markets, though, it helps to be long-term oriented.