Over-investing is just as bad as not investing enough
Many companies pride themselves in investing heavily in research and development in order to drive future growth. If additional profits are left over after taking care of expenses, it can be hugely beneficial to take that return and re-invest it for the betterment of the company in the hopes that it will pay off again next quarter.
But investing should be done thoughtfully and with a defined purpose and goals in mind. Shoveling money into your business on auto-pilot doesn’t always result in more success – there can be too much of a good thing. Once your expenditures have been taken care of, run through a quick checklist; Are you on track to earn the annual salary that you outlined for yourself at the beginning of the calendar or fiscal year?
As a business owner, you deserve to be fairly compensated at an amount commensurate with the amount of experience you have, as well as all of the duties you are responsible for within the company. Do you have an adequate amount set aside in a cash reserve for impromptu business opportunities or emergency costs? Investing for the growth of your company is well and good, but if you don’t have enough money on hand to pay for a necessary repair or front the costs necessary to work and win a prospective deal, your business is losing out.
Be strategic and strive for high ROI
If all of these things are accounted for, decide what percentage you want to reinvest back into your company. If you’re a startup, you may invest more heavily as your business has a lot of growing to do in order to compete with other contenders in the industry. And if you’re looking to sell your company in the next few years, heavier investments could lead to more success and make your company more attractive to potential buyers looking at your trajectory of growth.
A 25 percent reinvestment plan is pretty aggressive, and is probably the maximum amount you should invest in your company year over year unless there’s a particularly strong need. The key is to be strategic with the amounts you’re investing and making sure these investments are providing the returns that you seek, without selling other aspects of your business short. If you’re constantly putting more of your profits back into the company and not seeing a resulting increase in revenue or success proportionate to the additional profits you’re putting in, you are likely investing too much.