It is just about time that we toss out the old phrase “A penny saved is a penny earned.” This mindset might have been relevant and even helpful in the past, but today’s business owner needs to take a different and more daring approach.
Is money reinvested into your business considered spent money?
If you answered no, congratulations, you earned an A. If not, well, let’s take a moment to evaluate exactly what is going on in your profit margins.
Startups might not climb out of the red for the first several months of being in business. Depending on a variety of factors, some businesses might not ever see a profit until after the first year. This is fairly normal in the early days of any entrepreneurial adventure, but it can make it even more tempting to begin stashing away profits as soon as they begin to roll in.
But what exactly is all that money doing in an account? Chances are that a typical savings account will not yield an appreciable interest rate, so all of that hard-earned cash is mostly languishing there, unused. And your profits? Steady, but plateaued.
Now, imagine what would happen to those profit margins if a percentage of monthly profits was immediately reinvested back into the business. Product development, employee benefits, marketing and customer satisfaction can all see improvement from something as simple as taking 20 percent of your profit and putting it to work in your company.
For most business owners, 20 percent is a good rule of thumb. If your profit margins were $1,000 for the previous month, take at least $200 of that and put it right back into your operations. This still leaves you with $800 to do with as you’d like, although there is certainly no limit to the percentage that you can reinvest.
So, how long should you continue reinvesting at that 20 percent rate? For the answer to this question, you’ll need to consider what your desired level of wealth looks like. When your business reaches your ideal profit margin and you are satisfied with its operations, take the same 20 percent and consider outside investments. A steady monthly profit from your business combined with a solid investment portfolio can create a continuously growing fountain of wealth for dedicated entrepreneurs.