Why Reinvest 100% of Profits Back In Your Startup?
It’s very common in startups to reinvest 100% of profits back into business growth (after paying yourself minimum salaries, of course).
Especially in the first years.
Here’s why reinvesting is the best thing you can do for your business:
1. Pay less business tax
The less money you pay yourself, the less income tax you have to pay.
The fewer profits your business generates, the less business profit tax your business have to pay.
If a company generates a £20,000 profit and is in a 20-percent tax bracket, it would pay £4,000 in taxes. But if it reinvests £17,000 into business growth, only £3,000 is taxable 💡 (meaning you only have to pay £600 tax)
Calculations like this can become complex, but you will get the hang of them. When starting out, though, especially for an online business, it can be helpful to find Accountants for Amazon Sellers or merchants on other sites. Other examples include eCommerce for sites such as Etsy, eBay, and Shopify. Most are generally a less expensive alternative and offer expert guidance.
2. Grow your business quicker (without paying interest)
Most businesses need to grow for several years before they reach a profitable size. There are only a handful that starts generating money immediately with little to no future prospects of earnings growth.
If you don’t put some of the profits back into your business, you are not going to grow.
If you want to earn more than you currently do, you need to change the way you currently work.
That means scaling, improving processes, and hiring more and better people.
To grow a business quickly, you first have to spend money.
NB! Reinvesting your profits is better than a business loan because you don’t have to pay interest on borrowed money. Instead, you simply mark your profits as an expense and spend them on upgrading your business so that you can make more money in the future. 😏
Investing in marketing your company can have massive long-term benefits. The true return on investment of SEO, for instance, is much higher than most people imagine.
According to Robben Media:
“Say a health insurance provider ranks first on Google for their focus keyword “health insurance”. They receive 50,000 monthly clicks from Google. At a 3% sales conversion rate, these 50,000 clicks lead to 1,500 new customers at $1,333 monthly revenue per customer. The total SEO ROI is $2 million monthly and $24 million annually.
That’s all from one marketing channel. No sales reps, paid ads, conferences, or press relations needed. Pretty good, right??
3. It’s an opportunity to learn
Not all your investments will be successful. You’ll lose some money along the way, but it’s all part of it.
How else can you learn how to run effective Facebook ads and write effective website copy?
By trying them out, seeing what works and what doesn’t.
Mistakes are crucial in identifying a formula for success.
4. It allows for financial freedom
You could pay yourself £100,000 each year as your salary. You roll like that until you run the business into the ground.
Or you could pay yourself £50,000 a year, and reinvested the rest in the business 😏
Maybe in 3 years, you’ll be worth £50 million instead of £300,000.
See where I’m getting?
Paying yourself less makes a huge difference in the long run.