It makes sense in many respects to reinvest any free cash in your business.
Building a cash buffer for lean times is always a good strategy, but your reinvestment does not have to be limited only to this.
Putting aside profits is the most effective way to stave off a crisis in the event of unforeseen circumstances cropping up. It’s also a great way to reduce your stress. Such money should ideally be placed in an interest-bearing account, such as a money-market account, that gives you some flexibility in terms of how quickly or easily you can access that money in case of a cash emergency. This type of proactive cash management will also help you to demonstrate prudent business sense to potential funders or business partners.
Improve efficiencies that will increase your productivity, and thereby profitability: This could be in basic business equipment that allows you or your staff to be more productive - whether a faster computer, printer or software. Such reinvestment is in the long-term sustainability of your business.
Invest in yourself or your employees through training: This could be to increase your knowledge or understanding of an aspect of your work, or in an area you would like to expand into but currently don’t have the expertise.
Consider activities that add value to your business and brand: This could be in marketing activities that will bring in new business, or in freshening your brand or packaging if you’re in the product business. These last two activities should always be undertaken with a portion of your profits once you’ve squirreled away the bulk of your cash into some form of long-term savings. Business, by its very nature, is unpredictable. By adopting a responsible attitude towards your cash reserves you should be able to ride out any hiccups. Once you’ve reached a point where you have your future secured against unforeseen crisis you can start considering taking additional profits out by way of dividend payments to yourself or business partners. You will also know you have the right business partners if they recognise the importance of building a buffer instead of demanding that profits be paid out to shareholders.
Key take-away: Business survival is about being able to ride out the lean periods by having managed your cash resources prudently. Plan for the long term by being responsible in the short term.