Should you reinvest company profits back into your business?

Should you reinvest company profits back into your business?

If your business is making healthy profits, then your decision as a business owner is what you do with these profits.

Reinvesting profits back into your business could deliver long term growth and deliver additional profits. Your decision as a business owner is to balance financial stability with reinvesting profits for growth and which areas of the business to reinvest profits into.

In this blog we'll look at the benefits of reinvesting your profits, the areas of your company that may be good for business reinvestment to fuel business growth and achieve your business goals.

Retained profits

Deciding what to do with retained profits in a business can be a key decision. You have options to take the available profit as personal income via salary or dividends, leave the profit in the business to cover future business expenses and maintain healthy cash flow or use retained profit for reinvestment purposes.

Why would a business reinvest its profits?

Many business owners reinvest profits to fund the next stage of business growth. Reinvesting your profits can be a smart investment, can increase revenue in the long term and keep your business growing.

Business reinvestment is a long-term strategy for many businesses, but knowing how much is a reasonable amount to invest and the areas to invest into are key business decisions.

Benefits of reinvesting business profits

The main advantage of reinvesting business profit is to improve the business, prepare your business for the future and fund future growth.

Another advantage of profit reinvestment is that a profitable business can fund some or all of its own future growth, rather than having to borrow money to finance growth and take on additional business debt.

However, the lifeblood of many small and medium sized businesses is cash flow. As a small business owner, if you lack experience, then it's worth seeking professional advice from an accountant such as Haines Watts around your average monthly profit margins, cash flow and how much money to use as a business investment vs how much to leave in the business as a cash buffer.

When should a business reinvest profits?

When your company grows, you have retained profits and have built a healthy cash balance in the business, then it makes sense to consider reinvestment.

You'll need to maintain a cash balance in the business to cover business expenses including both current commitments and those that may crop up over the next six months or so.

More mature businesses will be able to look back at their actual profits and be able to forecast future profits more accurately than newer businesses.

Financing future growth from retained profits can be excellent way to use your profits, however, only financing a business in this way can also be a limiting factor. Some opportunities may arise that require additional investment and this may require external funding. Do not discount external funding to also grow your business, alongside the opportunity to reinvest profits.

How do you reinvest in your business?

The decision of how much to profit to retain in the business, how much to take as personal income and how much to reinvest can be a complicated one. Knowing when and where to spend money is a key consideration and below are just some of the areas that business owners can consider on their investment list.

Employee training

Investing in new employees and training of current employees can be good investments. New employees may enable you to increase productivity and may help you to take some of the burden off current employees to keep them in the longer term.

As a business owner, having enough hours in a day to run your business can often be a challenge as the business grows. Having employees that can take some of the day to day running of the business off you, allowing you more time to spend on business development or business strategy is often a great investment. This may be hiring administrative support or developing an employee to take on more day-to-day responsibility of running the business from you.

Investing in your own development or your employee's development can not only help to retain key people in the business but it can allow you to utilise these new skills in growing the business in the longer term.

Marketing

Investing in marketing can be a great way to help your business grow. You may want to invest money in online advertising, digital marketing, a better website or some direct marketing campaigns to generate new business streams.

You may want to hire a marketing consultant to advise you on the best way to grow the business and promote your products or services in the future. Having a clear marketing strategy and plan to grow the business can help you to achieve your business goals.

Business assets

Maybe it's time to buy new machinery, new equipment or expand or move premises. The right equipment, premises or the right software could vastly improve your operational efficiencies. Investing in new machinery may help you to streamline processes, leading to greater production, a decrease in expenses and increased profits.

Do not invest just because a new model happens to be available. Your investments should be in equipment that has a decent lifespan, will improve your working environment, streamline processes, or make your business more efficient and a better place to work for you and your employees.

Is a reinvestment considered a business expense and will reinvestment reduce your business's tax liability?

Reinvested money in your business will be classed as a business expense or a capital investment. This could reduce your business Corporation Tax bill and allow you to make use of tax reliefs and allowances.

If you are investing in certain things such as vehicles, equipment, hardware, plant and machinery etc. then Capital Allowances is the tax relief that is available to you for these types of capital investments in your business. The aim of Capital Allowances is to provide tax relief for the reduction in value of certain capital assets by letting you write-off their cost against the taxable income of your business. Not all investments qualify for tax relief or the same type of relief.

Until 31 March 2026 companies subject to UK corporation tax will receive a 100% first year tax deduction for expenditure they incur on qualifying plant or machinery.

Is there a risk when reinvesting back into your business?

Depending on what you invest your profit in, there is no guarantee of a return on that investment. Costs could outweigh benefits, so you need to carefully consider the potential investments, their impact on the business and what the business needs to grow.

Another risk is not leaving enough working capital in the business if you invest too much. Many businesses fail due to bad cash flow management, so you should carefully consider how much cash you retain in the business to cover business expenses but also unexpected events such as rising costs, decreasing demand, competitors entering the market or an economic downturn.

Summary

Once you have clear figures on retained profit, you can begin thinking about whether you should reinvest profits in your business. Smart reinvestment can fuel business growth and may lead to more revenue and greater profits in the future. However, before making these decisions, consult an accountant and tax advisor.

How can Haines Watts help?

At Haines Watts we advise and support thousands of business owners in making key decisions in their business and can help and advise on retained profits, cash flow management and reinvestment of profits.

Contact our team today inChester,  Wirral or Liverpool.