The number 1 sin for an accounting practice is failing to reinvest in the practice.
There can be the temptation in business to run it excessively lean and draw all the cash out and limit reinvestment. As Woolworths Ltd is currently demonstrating, this is fine for a few years but eventually the under investment takes its toll and profits fall. Every successful entrepreneur from Henry Ford to Bill Gates has made their wealth by reinvesting the majority of the businesses profits back into their business.
Reallocating profits and other resources back into your practice isn’t about wasting money on unnecessary expenses, but applying resources in a strategic manner that will result in higher profits and help you to reach your long-term goals of continued growth and success. If you want to build a big, profitable, and valuable practice then reinvestment of profits is essential. The benefits in reinvesting the profits back into your practice are:
- Reinvestment significantly increases the net profits.
- Reduces risk as the extra capital reduces the need for external borrowings to finance practice expansion.
- Allows for practice improvements including improving infrastructure, strengthening customer support, and a refined marketing strategy.
- An investment in marketing gains new clients and increases revenue.
- Provides capital to acquire a competitor’s practice which provides scale and removes a competitor.
- Provides the funds to invest in the training and education of the practice’s accountants.
Service businesses, like accounting practices, only require minimal ongoing capital investments (unlike manufacturing and other capital intensive industries). Typically, they only invest 3% of their annual revenue in ongoing capital investments. But for optimum growth practices should be reinvesting at least 20% of annual profits back into their practice as reinvestment is the fuel for practice growth.