After launching the website Penny Hoarder in 2010, Kyle Taylor quickly came to believe in an age-old adage: the best way to make money is to spend money. Every year, as a result, he began reinvesting 50 percent of his profits back into his burgeoning business.
While there are those who would dispute whether it is necessary to make that much of a commitment -- and still others who would question whether it’s wise to put a preplanned percentage on the amount that should be reinvested -- the consensus is that it is smart to engage in this practice, as opposed to squirreling away all the profits.
Here are the benefits of reinvesting, as exemplified by my own experience as well as Kyle Taylor’s personal account.
1. Reinvesting allows for growth
Taylor writes that his decision to reinvest enabled his site to take off. At the end of its first year (2011), it netted $55,000. Three years later he made $3.2 million, with the expectation that he would bring in $10 million the following year.
I have reached the same conclusion with my business. No sooner did I begin making money than I reinvested it -- hiring great talent, upgrading office space and purchasing new equipment. Months and years of reinvestment led in turn to even greater growth and profit, so I can recommend this strategy to any business owner, founder, or CFO.
2. The opportunity to learn and team-build
Besides the aforementioned growth, reinvestment also offers an opportunity to learn, and reinforces the idea that a single entrepreneur cannot go it alone. For instance, Taylor didn’t hire his first employee until 2015, and did so then because he understood his own strengths and weaknesses, and where he would need the most help.
Before reinvesting, Taylor often worked with freelancers and contractors, but was constantly re-evaluating and adjusting. Writers were jettisoned if they did not craft content in the site’s distinctive voice. A $20,000 site redesign was scrapped when he determined it did not work for him. He wasted money and failed to learn by forgoing investment in a solid team.
3. Reducing income-tax expenses
Another obvious advantage to reinvestment is the reduction in income-tax expenses. One report summarized it as follows: If a company generates a $20,000 profit and is in a 20-percent tax bracket, it would pay $4,000 in taxes. But if $3,000 of that profit is earmarked for freelancers, only $17,000 is taxable.
4. Successful investments in marketing and infrastructure
It is generally agreed that the best use of reinvestment is in marketing, as that will show the surest return. Taylor, once again, is a good example. He writes that in his first year he invested in affiliate ads, Adsense and sponsored posts and links. In his second year, his outlays went toward advertising on Facebook and Outbrain. Further down the line he made the decision to almost exclusively advertise on Facebook.
Another sound use for reinvestment is on infrastructure. Taylor did two redesigns of his site, and Gretchen Peterson, founder of the geoanalytics and map-making firm PetersonGIS, committed to mapping software, despite the considerable expense involved with doing so.
5. Hiring a great team (not just a good one)
People, of course, are a mandatory investment that cannot be ignored. When I ran my own firm, I was careful to make sure I assembled the best team possible, and that the freelancers and contractors who came aboard were assets to the company as well. Anything less, and you’re looking to take a financial hit of some consequence.
6. There’s ample room for profit
After reinvestment the question then becomes this: How much should a CEO pay him- or herself? One report concluded that performance-based compensation should account for 20 to 30 percent of profits, and that those at the top should earn half of that, along with a bonus of two to three percent. Clearly, there’s still room for bountiful profit when you reinvest. In fact, the growth caused by reinvestment should compound your profits significantly.
All in all, reinvesting is not only a less selfish move than hoarding profits; it’s good for your bottom line and the health of your business. I haven’t been disappointed by the results and believe your business will experience stellar outcomes, too.