Part 1 | Investment in Your Business
It might be tempting to keep all or most of the profit you make from your company for yourself in the early days. But you should resist this temptation because, if you’re looking for long term, stable growth, it’s important that you put some of that profit back into the business as an investment. Just how much depends on the state of your business, but it’s important to think about at any level.
The whole idea behind Entrepreneurial Bookkeeping is to teach you to manage your money in a way that allows for maximum growth, with the aim of also maximizing your long term profit. Whether or not you use some of your profit to invest in the growth of your business is one of the biggest differences between businesses that succeed in the long run and those that fail. Growing and improving your business is obviously important for any entrepreneur, but the best way to do that isn’t always obvious. For example, just how much should you invest back into the business? And what are the best places to invest it once you know that? We’ll walk you through how you can use what you’ve learned from past modules to figure this out.
First, let’s refresh your memory on what we covered in past modules. Go back and reread Module 2 if you want a more detailed refresher. Revenue is the money that your company brings in from the sale of goods and services. Owner distributions are money that you take out of the business for yourself that don’t go through payroll. Expenses are any costs that you need to pay to keep your business running and includes essentials like goods, payroll, and taxes. You should already be able to find these numbers easily on your P&L reports, which is partly why those reports are so useful.
Once you’ve figured out your revenue and expenses, subtract your distribution and expenses from your revenue. Anything that’s left over can then be invested. If you don’t have any money left over to invest, you need to focus on finding ways to increase revenue or lower expenses, otherwise you won’t be able to keep growing your business.
Here’s a simple illustration of the formula that you can refer back to whenever you’re thinking about this:
We talk a lot more about growth and investment in other modules but, for now, just remember that investing in assets that give you more revenue is a good way to use the money your business makes, especially if your goal is long term growth. The more you invest, the faster your business grows and the more profit you can look forward to down the line.
The Investment Process
If you’ve taken our advice, when your business is still classed as an LLC in the early days, investing back into the business is simple. Just write a check to deposit money into your business bank account. This goes under the owner equity section of your balance sheet. After you’ve formed an S corporation, this process changes a bit. You need to invest in your company’s shares, instead of directly into the business account. It’s important to check with your accountant before you start doing this to make sure that you do it the right way.
In the next module, we’ll talk about assets—the parts of your business that directly make you more money—to give you a better idea of where to invest.