What You Should Know About Reinvesting in Your Small Business
Has your small business started to turn enough profit that you think some additional capital could fuel further growth? Or maybe you’ve hit a rough patch and could use extra funds to ease cash flow constraints? Reinvesting in your business might be the answer.
Here are six tips for small business owners who are considering reinvesting.
- Ask Yourself the Tough Questions
First, determine whether reinvestment is a wise decision.
“The most challenging question is this: Would I invest in another company for this amount with the expected return?” says Robert Russo, CEO of Stone River, the parent company of discount code compilation website PromotionCode in Tallahassee, Florida. “On the surface, it seems like a straightforward question, but poring over your books can be surprisingly difficult because of the emotional proximity.”
Eric Hobbs, CEO of IT outsourcing firm Technology Associates in Cary, North Carolina, has faced the reinvestment decision multiple times. To get past the 2008 recession, he opted for a small capital reinvestment to cover immediate cash flow concerns while also downsizing the staff to position the company better for the future. He recommends evaluating the scenario as if you were a banker or were considering investing in your neighbor’s business.
“Consider the repayment terms,” Hobbs says. “Can the business support the repayment plan? What will happen if the business can’t repay your investment? Worst case, your business is in a rough spot and you keep throwing money at it, hoping things will turn around. No bank would lend on these terms, and neither should you.”
- Have a Plan
One of the most important things to consider with reinvestment is your expected return, says Noel Hillman, head of sales for Kabbage, a small business lender based in Atlanta. Make a detailed plan for how you’ll use the money and how the extra capital will drive revenue and help you repay the investment.
Reinvestment can be looked at in terms of efficiency, such as making current production cheaper, faster, or at a better quality. It can also be viewed in terms of growth, including scaling your business, moving into markets with new products or services, and leveraging current products or services in new ways, Hillman says.
Steps to do so can include purchasing or repairing equipment, hiring new employees, creating new product offerings or services, and expanding to new locations.
- Determine the Amount
To determine the reinvestment amount and the benefit it will provide, small business owners should consider all costs (hard, soft, opportunity, and so on) associated with the project, as well as potential revenue and uplift impacts. Owners should also evaluate three different scenarios, Hillman says:
- Higher costs and lower revenue than expected
- Costs and revenue roughly what was expected
- Lower costs and higher revenue than expected
Plan for funding the higher cost model to allow some cushion.
- Consider Timing
“Although it is counterintuitive,” Hillman says, “many times the best times to reinvest are not when things are going well. Competitors are also doing well, and a competitive advantage is tougher to gain in good times. During down times, innovating and reinvestment are even more important: It creates a larger gap of differentiation when times are good and produces a ‘higher valley’ during down times.”
Hillman also recommends that small businesses set aside funding to invest in testing and innovation so that it doesn’t affect the core business.
- Weigh the Risks
The biggest risks with reinvesting are changing market conditions and competitors that have lower costs or disruptive products and services, Hillman says. It’s also important to look out for trying to meet the needs of too broad of a market too quickly.
“Success usually comes in very defined markets and customers with a product that meets their needs specifically,” he says. “You can scale or grow to other markets, customers, and use cases once there is proven success.”
- Don’t Forget About Taxes
Finally, there are different tax implications that come with reinvesting capital into your business. Consult with a CPA or tax professional to ensure you’re covered, Hillman says.
Article Originally Posted on NFIB Date: March 30, 2017 Written By: Katie Truesdell