As soon as the news broke about the collapse of the Silicon Valley Bank and subsequently Signature Bank in New York, the inquiries began to pour in. Is it safe to leave my money in the bank? What is the best way to invest the profits I make in my business? One even wanted to know whether he should stop making payments on his loan. Suffice it to say that there was an abundance of nervous people who were wondering whether the banking crisis was about to plunge an even bigger dagger into the already unstable economy. I found that a great deal of this concern was shared by small business owners who were especially uptight about “where to keep or invest their hard-earned money.”
For small business owners, there was always the question of how to invest or reinvest profits. Simply keeping money in the bank was not the best option even before the banking crisis. With slim hope for potential returns and interest rates hovering around 1%, it certainly did not seem like a good way to build wealth. For those that ventured into real estate or in other businesses as a way of getting a greater return on their money, there was always the element of risk despite the potential for a significant upside. I have also seen businesses decline simply because the attention of ownership was diverted to the other investments. A good business model is as one put it: “one babysitter for one baby.”
One typical question that I and other business consultants often address in business consulting sessions is how much of profits should be reinvested into the business. The answer is, of course, different for every business owner but traditionally, experts recommend pouring at least 20% to 30% of profits back into the company. But that percentage may change depending on multiple factors, including timeline, goals for growth and personal financial needs. A common consensus is that if there are profits, a percentage of that must revert back to the business. It is a bad signal to employees when ownership takes out money from the business to fund another business investment without considering the needs of the core business.
Building value in a company is a goal worthy of pursuing since it ultimately fulfills the need to use a company as a source of wealth. Reinvestment helps reach the goal and is the best way to position a business for the future. Whether the exit strategy is succession by family members or trusted employees, sale or a merger, the goal should be to increase valuation, the experts counsel.
Warren Buffett is an American business magnate, investor, and philanthropist who is currently the chairman and CEO of Berkshire Hathaway. Says Buffett: “Reinvesting is the best way to build wealth. If you’re a business owner, reinvesting is crucial to your company’s continued growth and success. It’s worth keeping in mind that investing isn’t just about a sudden influx of cash — your time and experience are also extremely valuable.” What he seems to be saying is that reinvesting is more than about money. It means putting in the time, energy, and creativity to make the business a better business.
He strongly believes that “for any business that’s looking to grow, some form of reinvestment is necessary.” It doesn’t have to be all of your profits,” he says, “but a significant number of resources, when targeted effectively, can dramatically improve your bottom line.” This only confirms the notion that people should simply not use a business as a cash cow, to constantly draw money from the business to fund a specific lifestyle, for example.
It is noteworthy that so many people in our community understand the value of reinvesting in their businesses. Take a tour of some of the major business areas in communities like Brooklyn, Monsey, Lakewood and the Five Towns and you are likely to see that reinvestment firsthand. So many businesses have invested in the appearance of their stores with new storefronts, shelving and lighting. Others have invested in marketing and have subsequently seen sales soar.
The experts, including Mr. Buffett, particularly counsel startups to reinvest heavily. Sure, money is tight, but new businesses aren’t able to compete on the same level as the big guys, which is why they need to stretch their dollars to stand out. An aggressive expansion strategy is often in order for startups to get the company up to speed and to the point where it’s able to enter the marketplace as a serious contender.
Reinvesting means taking a serious look at a company and as one executive put it “finding the holes.” For some businesses, it may simply be a question of personnel. It might be that a business has grown to a point that it needs a CEO or a CFO to take the “business the next mile,” as one consultant put it. Ownership may be aging, and new leadership is necessary to maintain the momentum of growth. Status quo is never good for a business, and it takes good leadership to break away from the pack. Or it might simply be people in sales or in customer relations who will help increase the customer base and open up new opportunities. I have always believed that a company is only as good as the people who work for it.
In today’s rapidly changing business environment, the answer to a proper reinvestment might be in technology. Existing systems and processes may very well be outdated and upgrading technology might lead to greater efficiency which often directly affects profits. For many small businesses, technology upgrades may be long overdue, and they may actually be losing money because they are so far behind in technology. Expanding sales and marketing is another proven way to increase sales, the value of a business and significant greater profit. Finally, there is the possibility of acquiring a similar business that may add capacity, lists of customers, technology and more.
You may be right in that keeping your money in the bank may not be the best idea these days but using money wisely is. Reinvesting in one’s business may be the wisest decision of all. Yes, reinvest in yourself in every way, financially and otherwise.