SME business owners work hard to grow their businesses and generate profits that will allow them to fuel further success – but how do you optimise this process?
Linda Frier, Partner at Coalesco, said: “When a business begins to make a profit, it’s an exciting time for entrepreneurs and business owners. However, deciding what to do with that profit can be a challenge.
“Having worked with a wide range of businesses and business owners, I have seen the importance of profit planning and goal setting first-hand. This is the first step towards making the most of profits, without which we can’t move forward!”
What and why?
Before you make the most of your profits, you need to identify how you are going to use them and what your goals are.
Linda continued: “Making the most of profits means different things to each person, particularly when profits are integral to achieving a certain goal like percentage sales growth, taking on a new member of staff or taking a new product to market.
“Many SMEs have lower cash reserves than large businesses and may have lower profit margins due to lower economies of scale, making strategic use of profit very important.”
There are a number of ways in which profit can be used to maximum benefit, with the most common including:
- Reinvestment – This could mean upgrading technology, expanding physical locations, increasing working capital, or investing in employee training as a sign of long-term commitment to your company’s growth
- Debt reduction – Using profits to pay off debt can relieve financial pressure and reduce the amount spent on interest, freeing up resources for other uses
- Shareholder dividends – Providing dividends can be a way to reward shareholders for their trust and to encourage further investment
- Creating cash reserves – Building a cash reserve offers a cushion against future economic downturns or provides funding for unexpected opportunities
- Personal drawings – For many SME owners, extracting profits for personal use is also a priority, whether it’s for personal investments, savings, or expenses.
“However you choose to use profits,” said Linda, “it’s important that you make a plan of action and stick to it to avoid wasting time and money, and ensuring that you protect your business going forward.”
Optimising profit allocation
Once you know how you want to use your profits and what goals you hope to achieve, you can begin to form a strategy for allocating and investing funds.
How? As an SME, your business should prioritise sustainability and sound economic moves to avoid creating too much risk at a time when your business is developing.
“This means planning profit allocation with caution and ambition to strike a balance between achieving your goals and protecting what you have already built,” said Linda.
This may include:
- Cost-benefit analysis – Identify the costs and drawbacks of your profit allocation strategy and balance these when investing or extracting profit
- Forecasting ROI – Try to identify which investment route will provide the highest return on investment (ROI), particularly if you have limited cash reserves
- Splitting personal and professional goals – If you want to grow your business and fund your lifestyle, consider investing moderately in both goals, as prioritising one can detract from the other
- Optimising business processes – Consider whether taking on a new employee or an expensive piece of software is the right move by optimising the efficiency of existing systems through technology and workflows
- Being cautious with debt – Most businesses need to take on debt, and profit is a good way of repaying debt, but try to keep unnecessary debt to a minimum as high levels of debt can reduce profits available for growth.
Linda finished: “Profit allocation is one of the more complex aspects of running a business.
“Profit has the potential for use in so many areas, including growing the business or funding an entrepreneur’s life and family, but profit is also finite.
“It’s important that business owners commit to a goal and a strategy before making any major moves with their profit, as aimless spending is a sure-fire way of minimising the outcome and wasting their hard work.
“In my experience, profit allocation strategies are best produced in line with overall business growth strategies to ensure long-term goals are being met and that the business is on track for future success.”
For advice on optimising your profit and growing your business, please contact our team today to discuss your needs.
