Reinvestment critical for start-ups

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Bikky Khosla | 12 Mar, 2013
Now what . . . after a lot of struggles, your small business is picking up now. Money is pouring in and you're wondering what to do with the hard-earned money -- upgrade your car, splurge on an overseas trip, or buy a new home! Hang on -- this is a trap budding entrepreneurs often fall into. They make haste to pull out profits too early, without giving any thought to reinvestment, and as a result, fail to feed their venture at the crucial star-up phase when a little can mean a lot.

I don't think there is anything unusual about an entrepreneur getting elated to see the initial efforts bearing fruit, but this is when temptation calls, and one needs to tread cautiously. Usually a business sees slowest growth in its first five years while in contrast this is the period when investments are required most. So, the more the money put back into the business during this phase, the better it is. What else could be the best use of profits!

Of course, it might not always be possible for a small entrepreneur to support his living without taking some money out of his business, but here I think what one must consider is to keep personal and business finances separate at all times, and maintain a strict earnings management system that dictates when and how much cash is to be removed to meet personal expenses. Just treat yourself as a salaried employee and stick to a plan for covering your personal expenses.

Growth should be the prime objective during the start-up phase, and this is why reinvestment is critical. I suggest every start-up to make a continuous effort to put as much profits as possible back into the business, and never let an reinvestment opportunity, small or big, go to waste. This may at times seem being bit harsh on yourself, but ultimately, in the long-run, it's the best thing you can do for you business.

But never try to bite off more than you can chew. Many small businesses reinvest earnings to that extent that their cash flow gets affected. It does more bad than good. Before ploughing back profits into your business, always take a long, hard look at your financials to ensure that the reinvestment will support growth, not deter it. In addition, beware of spending for a wrong purpose. Spend only on those items that will fast track your journey from small to big and on those factors that have a long-term value.

And now the question is -- how much to invest? There is no hard and fast rule, and the amount may vary according to circumstances, but I think in the first two-three years, 40-50% is a reasonable goal. But again, I would like to remind you to carefully consider the risks and returns, and track every investment to definitive outcomes before investing. And finally, again, never consider your retained profits as cash for splurging on celebrations.