As an aspiring entrepreneur who has had various small businesses, I can relate to Startups and SMEs who tend not to reinvest money made back into the firm. We tend to dip our hand into it for personal expenditures believing it’s our entitlement. This is totally wrong, especially if the plan is to grow the business.
From a very young age, my mum taught me entrepreneurial skills especially concerning money management in business which I have tried to apply.
She successfully ran her Supermarket, Pharmacy & Clinic as if it was a big business. Every income and expenditure were accounted for from its inception. Even when family emergencies came up, as a nurse she had a salary and savings account. She always checked them first. She did not pay herself a salary from the business.
Considering her professional career was Nursing, she ensured we managed and survived on that earnings with the support of my dad’s income. I still wonder where she got all these skills. This result might have been as a result of her also having an entrepreneurial mother, my grandmother.
The skills she implemented can also be learnt from practicing them. You might not be able to reinvest the entire revenue/profit back into the business, depending on nature of the business, however, try to reinvest at least half of the profit / retained earnings in the first 3 to 5 years of the business when its capital intensive.
Some of the reasons you should reinvest the money includes:
- Fostering Faster growth for the business so it can grow sales and profits for its shareholders
- Potential Investors can perceive the firm to have history of success and profitability
- Opportunity to make mistakes and learn
- Create Competitive Advantage
- Money can be used to Hire the right talent
- Paying less tax
If retained income/earnings is reinvested, it can be grouped as the business expense which will, in turn, lower net income which is taxed. The money can be used for product/service development, further research and development, pay for advertising, hire more talent, train employees, purchase new equipment, buy a property for expansion, or even to maintain, repair or improve firms existing facilities.
It’s not always easy to reinvest money in business, but trust me, if you can it will be beneficial in a long run. No matter how small the business is, treat it like a big business from day one. Don’t give up too easy. Hang in there.