Investing in Your Business: What You Need to Know Before You Get Started
The superstar entrepreneur you follow on Instagram just posted about the new video equipment she bought for her business. Your favorite Facebook group is abuzz about running Facebook ads. And your business BFF just expanded their product line with a big inventory order.
So does that mean it’s time for you to grab new video equipment, brainstorm ad copy, or order more inventory? Sorry to be a total buzzkill, but no. At least, not without a plan.
Whether investing in your business is something you’re dying to do, or something you approach with a heaping dose of trepidation, doing your due diligence ahead of time can help you make sure you’re making the right decision for your business.
There are three main considerations when deciding whether you’re ready to invest money back into growing and scaling your business.
Here’s what you need to know before investing in your business:
- Your business’ finances
- Your personal finances
- Your goals
Once you have a solid understanding of all three, you’ll be in a better position to make the right calls about how much to invest back in your business.
Understanding your business’ finances
How much can you invest?
This is a tricky question, because the answer depends on a lot of factors. If you want to rapidly scale your business, you might forgo paying yourself and pour that money back into new marketing initiatives, which is what Steven Smith did when he was growing Evein Luxury Car Care.
“I didn’t take a salary from the company for the first 3 or 4 months, and I reinvested every single penny back into ads and our packaging designs, to make sure we could grow as quickly as possible. After a few months of tweaking our ads for better returns, we were now getting the same income amount for a third of the price—which let us triple our ad spend on the best-performing ads and have massive success.”
“If I had taken a salary at the start, we wouldn’t have been able to learn and spend money on ads to see what worked”
Not taking any money out of your business to pay yourself isn’t an option for everyone, but Steven does present a great point. Money you invest in your business has to come from somewhere.
Money you invest in your business has to come from somewhere.
One of the most approachable frameworks for managing your small business finances, and figuring out where that money will come from, is called Profit First. It’s a simple system outlined in the book, Profit First, by Mike Michalowicz.
It breaks down your business’ total revenue into four categories:
- Owner’s Compensation
- Operating Expenses
- Taxes
- Profit
How much of your revenue goes to each category depends on your industry and your business’ size, and Michalowicz suggests some easy formulas to follow in the book. Here’s an example, with some real numbers.
Let’s say your business does $2,000 a month in sales—that’s your total revenue.
You’re following Profit First, and this is how much you’re allocating to each category (based on your business, not the recommended formula):
- Owner’s Compensation: 40%
- Operating Expenses: 40%
- Taxes: 15%
- Profit: 5%
That means that every month, your account balances would look like this:
- Owner’s Compensation: $800 (to pay yourself)
- Operating Expenses: $800 (to cover expenses)
- Taxes: $300 (to pay taxes)
- Profit: $100 (to take as profit)
How much you put into each category is flexible, and will depend on the realities of your business. No matter how much you’re making, or how you’re allocating the percentages, you’ll be able to see a clear-cut overview of where cash is going at a high level, and where you could find money to invest if it’s right for you.
In the example above, if your operating expenses are just enough to cover your cost of goods sold and your monthly expenses, you won’t be able to pull money from there to invest in your business. That means you’re looking at either reducing your compensation, or not taking profit from your business right now—both are viable options, but only you can decide which option is right for you right now.
And yes, your tax savings are always off-limits, which will save you so much stress and heartache at tax time.
What’s your annual forecast?
Now maybe your business is new, growing at a rapid pace, or is at the whim of seasonal swings. In any of those cases, a monthly view of your business might not give you the information you need to make a solid call about your investments.
That’s where an annual forecast comes in. This forecasting template is built for seasonal businesses, but it can help you map out your year to get a full picture of what’s coming up. It can also help you balance your expenses over the year. If you want to invest in a website redesign in the off-season, that’s fine, as long as you do it in the context of your whole year—and don’t end up in the red at the end of the year because of it.
How is your cash flow?
Spending money you don’t have isn’t always off-limits, which is why things like small business loans and investors exist. But in any case, you should always know how much cash you have available, how and when you’re planning to spend it, and where you might run into issues. Even if you started a low investment business with a frugal mindset, it doesn’t mean your business always has to run on minimal investment. If you are looking for investment or funding to grow your business, check this guide on how to get a business loan.
Whether you’re using a business loan calculator, planning out how you’ll spend a loan, or how you’ll spend your monthly operating expenses budget, getting a handle on your cash flow is something you need to do before you make any big investment decisions. That way, you won’t end up without enough money to cover your next inventory order because you took a big swing and overspent on a Facebook ad campaign.