By attracting new customers, adding new business locations or adding new products, your business can increase its number of revenue streams and hopefully generate increased profit from them. Adding new sources of income also helps insulate your business from the risks of operating with one primary source of income in the event that source dries up at some point.
New or developing markets, or emerging customer segments, are ripe for the taking. While small businesses especially might consider sticking to what they know and staying comfortable, the race for new capital and income streams is critical. If your competitors gain access to those new market opportunities because they invest in growth, they also get new funds to use for marketing, which increases demand, and further reinvestment in growth going forward.
From a shareholder perspective, a company that reinvests its income instead of pays dividends is in growth mode. While this means shareholders do not get cash distributions from their shares, they can feel more confident that the company wants to grow. Over the long run, growth in the size and profit potential of a business increases the value of its shares or the value of having an ownership role and financial stake in the business.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since Reinvesting your retained profits into the business is clearly the optimum form of finance. If your enterprise is making profits, it can reinvest them to further improve profitability, productivity or efficiency and will improve balance sheet strength. This will increase the value of the business without the commitment of liabilities.
Before forming an investment strategy that relies too heavily on reinvestment, recheck and discount the basis upon which you make profit forecasts. If this is a new enterprise, what is the confidence level of the projections? This time is usually spent learning the trade and finding the market. In fact, many enterprises fail just as they prove that they have a product, a market and potential for profit-making, simply because they lack working capital.
More mature enterprises can look back on their own record of actual profit against predicted profit and base their estimations on the emerging pattern. These business owners may not have any other source of income outside of the small business and may not be able to afford to reinvest a significant portion of their profits.
When expanding a business, whether large or small, there are two primary sources of funds -- debt and equity. For small businesses, debt typically comes from loans from banks or other financial institutions.
Equity can come from outside investment or from reinvesting profits. If a company funds a business expansion or improvement with reinvested profits, it can avoid taking on excess debt and the corresponding interest payments that can threaten the financial health of the company.
Another advantage of using reinvested profits to fund business activities is that owners can avoid diluting their ownership. Just as there are disadvantages to funding business growth with debt, there are disadvantages associated with using external equity. When an investor purchases equity in a company, he becomes a partial owner, usually with corresponding control rights.
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