In discussing strategies for startups and small businesses, there’s always a lot of talk about how entrepreneurs can obtain early funding. We talk about how common it is for startups to get off the ground with financial help from family and friends, for instance. In some cases, we highlight successful campaigns on Kickstarter as reasons to explore the crowdfunding route. And of course, there’s venture capital to consider.
Securing adequate funding is always more difficult than it seems it will be. But all of these options can help you to raise money when you’re trying to get your own company started. What we don’t talk about quite as frequently, however, is that startup owners should do with the money they actually earn once the business starts to profit. Of course, one option is simply to pocket the profits (or do so by increasing salaries), which in some ways is the goal of the business in the first place. However, there are also different ways for new and small business owners to invest profits so as to make the most of them.
The practice of reinvesting profits is basically that of using them to address business expenses — and in doing so avoid taking on excess debt, or losing unnecessary equity. For a lot of startups it’s common practice to accept loans or sell equity in order to fund new projects, expanded inventory, or even simply operational costs for a given period of time. But if profits are reinvested strategically, a startup founder can avoid turning to outside help, and thus keep the business in more stable financial standing.
Hiring can be looked at as a form of reinvestment. But rather than conceding the preservation of a business or the coverage of costs for something specific, it’s usually a step toward expansion or improvement. Some business owners, for instance, might determine that they can maximize profits moving forward by investing in an in-house accountant. Others might decide that hiring a marketing professional or social media manager might help to expand business. These are fairly general instances in which directing profits toward new hires can effectively help to improve the business.
3. Outside Investment
Investing profits for growth can be a risky prospect, though there are more careful, conservative ways to do it. Perhaps the best options for busy business owners are index funds — which are diverse bundles of assets that are traded was one entity. There are different types of funds of this nature to consider. A standard fund like the S&P monitors movement among major stock market entries. Similarly however, gold ETFs consist of numerous assets measuring the price of gold, and are sometimes seen as being doubly conservative (gold being generally less volatile than stocks, and indexes being more stable than individual stocks or commodities). Funds like these, in stocks or in precious metals, do not guarantee growth. However they’re seen as reliable long-term plays, and therefore give business owners the potential to stash their profits and grow them over time — either as “rainy day funds” for business or simply for additional profit.
The decision to diversify a business should involve more than just consideration of profits. On the one hand, expanding offerings through a new product or service, or even a new store, can be can exciting endeavor with vast potential. On the other, these changes often involve more investment or effort than they might seem to at first, and a young business can easily become overextended. It’s vital for any business owner to weigh these pros and cons and consider the matter carefully. Nevertheless, if and when it makes sense to diversify the business, this can be another strategic use of early profits.