It is essential to decide how to use profits from your business strategically.
The decisions you make today will influence your company’s growth, stability and future success. The key part of these decisions shold be ensuring your business thrives in both the short and long term. And yes, you can also reward yourself. :-)
Here are five smart ways to allocate business profits to ensure future growth and financial health.
1. Save for emergencies
One of the first things businesses should do when they make a profit is to build an emergency fund. In emerging and developing economies, businesses are often vulnerable to disruptions such as economic downturns, supply chain failures, or even political instability.
But frankly, these disruptions can occur in any country, including in more devleoped ones. Having enough cash reserves ensures that your business can handle any storm that comes its way.
How much should you save?
The standard recommendation is to save three to six months’ worth of operating expenses. This helps cover salaries, rent and essential costs in case your revenue unexpectedly slows down. A solid financial reserve - AKA emergency fund - offers peace of mind and also demonstrates financial discipline to potential investors.
Why this matters
A robust emergency fund strengthens the long-term sustainability of your business and provides a safety net during unforeseen disruptions. It helps ensure that you can continue operating smoothly.
2. Reinvest in your business
Reinvestment is a key driver for growth.
Reinvestment can be done in multiple ways, like upgrading your technology, recruiting new employees, or improving your product offerings. At the end of the day, putting money back into your business can increase your profitability over time.
It also helps you build a stronger negotiating position when you are preparing for conversations with funders.
Some strategic reinvestment options include:
Expanding your marketing efforts
A stronger marketing presence can help attract new customers, especially your Most Profitable Customers who create the most value in your business.
New products or services
Launching new offerings can help you upsell or cross-sell to existing clients or expand your operations into new markets.
Upgrading technology
Automating processes or enhancing service delivery can significantly improve efficiency and customer experience.
Before committing to large reinvestments, take a look at your business plan to ensure that the decision aligns with your long-term objectives and that you have the capital to handle potential new costs.
3. Pay down or refinance debt
Many businesses choose to take on debt to get their businesses up and running. However, once the business becomes profitable, it is a good idea to allocate some of those profits to reduce your debt. Paying down debt helps you reduce interest payments, freeing up future cash flow that can be used for growth.
- Paying down the principal amount helps to reduce the amount of debt in the business and in time, also leads to lower interest costs. This allows you to keep more money in the business.
- Refinancing loans: As the financial situation of your business improves, you might qualify for better loan terms. If that is the case, look into the possibility of refinancing your existing loans to take advantage of a lower interest rate.
4. Pay yourself, responsibly
Small business owners drive themselves hard and do that on a daily basis.
They work hard to get new customers, deal with operational issues, handle HR and difficult customers, oversee finances and also carry the responsibility of marketing the business.
So when (higher) profits come in, it's important to reward yourself for all the hard work you put in to get to this point. However, it is crucial to maintain a good balance between paying yourself and reinvesting in the future growth of your business. You don’t want to drain your company’s profits to the point that this becomes an obstacle for your future expansion.
If your business is a sole proprietorship or partnership, profits automatically flow to you as personal income. For limited corporations, paying yourself a higher salary or a bonus is an option. However, before you make any decisions, consult with a tax advisor to determine how paying yourself affects your personal and business tax liabilities.
5. Invest in marketing and brand building
Marketing plays a crucial role in driving growth, especially in markets where brand visibility and personal trust are key to success. Using profits to bolster your marketing efforts can help increase customer acquisition and overall brand strength. If you use it wisely, it can also help you increase customer retention.
Generally speaking, you have three key options that can also be combined:
- Digital marketing campaigns: you can increase your online presence by investing in search engine optimisation (SEO), social media advertising, or content marketing. Digital marketing is particularly effective for reaching customers who mainly use mobile. It is also a great way to build your brand recognition. In Liberia, the school run by my NGO uses Facebook marketing campaigns to create buzz around the brand.
- Offline advertising: whether you choose to do offline advertising will depend greatly on your market and specifically, on the best ways (channels) through which you can reach your customers. It is also very important to understand what pain points your customers are dealing with. Traditional marketing efforts such as radio or tv ads, billboards and sponsorships can help raise awareness about your business, your brand and your products.
- Customer retention strategies: businesses sometimes focus too much on getting new customers instead of retaining the customers that they already have. But customer retention is one of the best ways to grow your business! Consider investing in loyalty programmes or offering special promotions to keep customers coming back.
Why this matters
Effective marketing campaigns do two things: they attract new customers and also help to retain existing ones. The result for the business is a boost in long-term growth and profitability.
Conclusion
Understanding how to use business profits strategically is vital for long-term success. Whatever option you choose, each decision should be made with a focus on ensuring growth and sustainability.
Using your profits wisely can help your business navigate challenges, seize new opportunities and build a foundation for future success. Additionally, if you succeed in maintaining a good balance between rewarding yourself and investing in your business, you will be setting your company up for sustained profitability and expansion in the years to come.
