Starting a business is an immensely complex process. It begins with an idea, and evolves into a long struggle of putting that idea into action. You may need to rent a workspace, hire employees, design products or organise services, and establish a working price model—and that’s all before you even open for business. Once everything is up and running, you’ll need to manage day-to-day operations, track revenue and inventory, and take all the steps needed to keep things moving smoothly.
With all the time and energy that goes into addressing all of those steps, it’s not uncommon for a small business owner to encounter a tricky problem once things start going well: what do you actually do with profits? In other words, if the business succeeds to the point that it begins to generate money, where does that money actually go?
The short answer is that it should go toward addressing direct needs and paying any employees on board who require fair compensation. But the real nature of the question is what to do when you’re making an actual profit that exceeds your planned day-to-day expenses. The temptation, of course, will be to pocket it. After all, you started a business to make money, and there it is! But if you want your small business to not only succeed, but thrive, the better course of action is to put surplus profits to work for the business.
Here are a few ideas for how you can invest profits on behalf of your business:
1. Educate yourself on your needs
Before you actually put money into any particular effort or investment plan, it’s best to do a very careful assessment of where your business may have needs. The best defence against simple mistakes is education, and that’s true for any sort of investment and not just dealing with small business profits. Understanding your own needs and tendencies, where the investment can stretch furthest, where interest rates may come into play, etc., will all help you to make the most effective decisions.
2. Address standing debts
Most would argue that it’s best to wipe out any debts before spending money elsewhere to improve the business. This is because in most instances (aside from loans from friends and family, perhaps), debt owed will increase over time due to interest. As long as the business can remain functional without a fresh influx of cash, the first course of action should be to direct profits toward debt.
3. Invest in infrastructure
Within the context of what you find when assessing your needs and educating potential avenues of investment, it’s a good idea to look to internal operations and infrastructure. It’s always wise to apply funds in line with your specific development plan, whether that means increasing inventory, improving advertising, or even hiring new employees to make certain aspects of the company run more efficiently. Putting funds directly back into company needs is often referred to as “re-investing,” and it’s often the smartest course of action when you begin to generate some profits.
4. Put money into a simple fund
If you’ve addressed debts and infrastructure and you reach a point where you still have profits, you can begin to invest them in a more traditional manner. This will help them grow over time rather than you just pocketing them. For those profits, you should construct a simple portfolio or fund that allows them to take advantage of reliable, long-term strategies. Index and mutual funds tend to work well, as they can allow you to put your money to work without needing to maintain hands-on control of trades.
Through these practices, you should be able to use your profits effectively.
About the author:
This article was written by Adam Garrison, a freelance writer specialising in finance and investment.