Your business isn’t going to survive if it isn’t making a profit. But even it is, it’s only half the battle. Once you’ve earned a profit, you also need to invest the money wisely. Ideally, you want to look for ways to invest the money so that it increases your profits, reduces your debt load, or prepares you for the future. While saving the money will allow you to pay for unplanned expenses, there are other ways you can put that money to use. Here are 7 ways to use your business’s profits wisely.
Create an Emergency Fund
You may have heard the advice to save the first dollar from your first sale as a memento. It is often framed and hung on the wall with pride in a small business. However, you should be systematically saving part of your profits every month. These savings will allow you to pay the bills when there is a slump in sales or when unplanned expenses occur. After all, business insurance will cover many disasters, but it won’t cover everything. With a cash reserve, you don’t have to lay people off while you retool the business in response to changing market conditions. The savings account can even increase the value of the business, whether you’re marketing it to investors or want to borrow against the equity in it.
Invest in Yourself
Many small business owners put every dollar back into the business, and they may do so despite the personal sacrifice. However, you should stop and reassess the situation once you’re earning a profit. Do you need to pay yourself? Don’t continue investing every dollar in the business if you aren’t paying your living expenses. Pay yourself a salary, even if it is modest. However, you should consult with a tax advisor so that you minimise the potential tax bill this could generate.
If you are already paying yourself a modest salary, consider paying for classes on business management or finance. You could even consider getting an online degree in business or a related field that could be helpful. This is invaluable if you don’t come from a business background. Some of the options we can think of include facilities management, MBAs, finance, accounting, or marketing. You could even decide to go for an IT degree if you’re involved in tech.
Alternatively, you could identify those areas you’re weak in and hire help. This is true whether you hire an accountant, website designer, or someone to work the cash register in the evening. Outsource the tasks you don’t like to do or don’t do well so that you’re free to spend more time on what you are good at doing. Just make sure you’re using someone qualified for the job.
Contribute to an RRSP
As a business owner, you are also responsible for saving your own money for retirement. You should consider saving for your future in a tax-advantaged account like an RRSP the moment you have money available. The money you contribute that year will be exempt from CRA taxes the year you put money in the account. That reduces your current-year tax bill.
If you want to learn what is RRSP, WealthSimple has a great explanation piece on the topic. They explain things like how it differs from a TFSA and which one between the two would the best option for you. It also explains some of the benefits of having an RRSP, like being able to tap into the RRSP if you want to buy a home. However, always remember that an RRSP should primarily be used to save for retirement.
Pay Down Debt
Debt is a burden. The payments consume valuable cash that could be used to buy inventory or pay people to serve more customers every year. In some cases, bills just keep coming and debts mount up, leaving you struggling to make ends meet. Bankruptcy attorneys like the attorneys here could be a source of relief if you find yourself at this point. However, if you have some cash, consider paying down any high-interest rate debts. Then set some aside in savings so that you don’t have to borrow money at those rates to pay for things.
If you don’t have much cash available, then you need to look at refinancing. Update your financial reports and talk with your lender. You may be able to demonstrate that you’re at a lower risk of default because you’re now profitable. If they’re willing to lower the interest rate and thus the monthly payments on your debt, this will free up cash flow. Furthermore, it will result in a lower debt load that increases your creditworthiness if you do need to borrow more money later.
Invest the Money in Business Improvements
Note that you should only invest money in line with your current strategic plan. That means you can’t use the money you’ve set aside to buy things you wouldn’t otherwise buy. Instead, buy equipment that lets you make items faster and at a lower per-unit cost. Or, you may want to invest in software that reduces the amount of time you have to spend on business administration.
Be careful about expanding your existing brick and mortar business, hiring new staff, or starting a new line of business. Do the cost-benefit analysis, then make the right decision based on the hard data. For example, it may make more sense to move into a bigger location than taking over the unit next door. Instead of hiring new people, it might be better to invest in your current team, training them in better work methods or offering better benefits to prevent your experienced people from leaving.
Overexpansion is one of the biggest tragedies in business. This is when a business expands too fast without realizing the financial implications of it. Having to manage another facility puts a lot of weight on your business’s structure, and not everyone is ready for it. Many systems will need to be put in place to ensure accountability and allow you to monitor the performance of a second and third location. You also have to understand how it can hinder cash flow for your primary operation.
This is why we would suggest you consult with a business expansion consultant before you consider expanding. They will tell you if you’re ready to expand and what needs to be done to make sure that it’s sustainable.
Invest in Marketing
Marketing is often one of the best ways to use your available free cash when it is done well. If you don’t have a website, create one. If you have a website, start by researching performance metrics such as the conversion rate of your website. Then you can begin a digital marketing campaign.
Keep track of your performance metrics, and make adjustments to see what works best. If you don’t have experience in marketing, consider hiring an expert for advice. You might significantly increase sales by improving the search engine optimisation of your website. This would also be a good time to start trying new techniques like email marketing, or even trying to build a viral campaign on social media. If you don’t have a dedicated team, you could consider building one or outsourcing.
Don’t neglect traditional marketing methods though. Things like print advertising can still pay dividends and allow you to reach people who don’t spend most of the time online. We also suggest you look into things such as media buying. This will allow you to reach different audiences by purchasing ad space across various platforms.
PPC marketing is another very powerful tool we suggest you look into. PPC, or pay-per-click marketing, allows your business to appear near the top of search engine results by bidding on specific search terms. Once someone searches for this term, your ad will appear in the sponsored results. The more you pay for the keywords and the better you perform on other metrics such as click-through rates, the higher your ad will appear.
The beauty of PPC is that it’s very precise. You know exactly where every marketing dollar goes and how it performs. This will allow you to keep your spending in check.
We also want to stress the importance of constantly working on your website and testing. Too many people focus on getting more traffic. Instead, they should focus on doing more with the traffic they have. You want to increase engagement and the time people on your site. You want to have a way to capture their contact information. And, more importantly, you want more of them to buy. This is why you will need to work with an expert team if you aren’t already. Any little savings you make by testing yourself will be negated by your lower performance. So, make sure that you invest where it counts and you will reap the rewards.
Invest in Expertise
We mentioned business expansion consultants earlier, but there are tons of other consultants that could help your business. You could hire an IT consultant that will allow you to tighten up your defenses. These could be extremely valuable if you’re trying to go remote or have a bring your own device policy. You could hire a sales consultant to improve their performance and help you monitor the performance of your team better, or you could hire a strategy consultant to help you establish a road map for the next few years.
Earning a profit is a major milestone for any start-up. Once you have cash, however, you need to make smart decisions regarding its use if you want to get the most out of it.