Putting profits back into your business
Warren Edward Buffett is an American business magnate, investor and philanthropist. He is the most successful investor in the world and is the chairman, CEO and largest shareholder of Berkshire Hathaway, and is consistently ranked among the world’s wealthiest people. One of his investment rules is to invest in companies that reinvest their profit as this maximises growth and the company value.
The benefits in reinvesting the profits back into your business include:
- Reinvestment significantly increases the net profits.
- Speeds up revenue growth.
- Reduces risk as the extra capital reduces the need for external borrowing to finance the business expansion.
- Allows for business improvements including improving infrastructure, strengthening customer support, and a refined marketing strategy.
- An investment in marketing will often pay off with increased market shares and sales in the future.
- Provides capital to acquire competitors which increases market share and removes a competitor.
- Provides the funds to invest in training and education of the workforce.
Every successful entrepreneur from Henry Ford to Bill Gates has made their wealth by reinvesting the majority of the business’s profits back into their business. Reallocating profits and other resources back into your business 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 business then reinvestment of profits is essential. The percentage of profits to reinvest varies from business to business, and depends on the owner’s goals, but is normally at least 50%.