Profit reinvestment and allocation may present savvy small and medium-sized enterprises (SMEs) with value-add opportunities, according to a new report published by Allica Bank.
The study found that one in four UK small businesses list profit reinvestment as the top driver of success. Of the 1,000 firms surveyed, the top performers reinvested an average of nine percent of their profits, with a correlation between this investment and medium-term revenue growth.
“It’s all very well and good reinvesting everything into the business,” says Jamie Keeling, managing director of consultancy firm Bulletproof Business Services, “but as the phrase goes, you need to be prepared for when the proverbial does hit the fan.
“If you’ve been reinvesting everything into the growth of the business and reinvesting all of your profits, when something like this happens – and as has been proven over the last six months, these things do happen – sometimes they can hit you harder than you would expect.”
However David Eaton, director of advisory firm SME Strategies, says that reinvestment figures should depend on an individual business’s accounts and that reinvestment percentages will vary from firm to firm.
Before deciding to reinvest profits outright, Eaton says that firms need to dialogue honestly about revenue, expenses, operational costs, existing debts and investments.
“Those questions are really fundamental and the answer to them will then tell us what’s in the cell at the bottom line of how much we’ve got to reinvest,” says Eaton.
“So rather than saying, ‘What do I do with the bottom line number?’, it’s: ‘How have I arrived at it? What are the assumptions that got me there in the first place?’”
Keeling adds that businesses in already hard-hit sectors should consider how the winter will impact their services. Negotiating rent reductions and other commercial considerations can free up funds, or even indicate that a business should limit their profit reinvestments, he says.
“Often, success in business does come down to the ‘boring’ stuff,” Keeling says.
“It’s about knowing your market, and the best way to do that is to be completing regular slot assessments.”
These quarterly assessments are crucial; WorkLife’s latest Small Business Monitor found that 62 percent of businesses expect their income levels to remain halved for the next 12 months.
Before pumping funds back into the business, Keeling advises leaders to consider what existing finances look like and prioritise cashflow, debt repayments, savings pots and to plan ahead for future eventualities.
This includes allocating funds for VAT and rent, particularly if the business utilised coronavirus-driven rent or tax holidays.
Keeling adds that if a business chooses to reinvest its profits, it should have a drawn-out plan to understand exactly how that investment will come to fruition, but to be wary of overextending themselves ahead of an uncertain winter.
“Because as any business owner should know, it takes a damn long time to build a good reputation, but it takes five seconds to shatter it,” Keeling says.