For business owners, the last few years have seen shifting trends, opportunities and challenges—from tax law changes and increased M&A activity, to technology advances and low unemployment. These changes impact how, and if, owners decide to reinvest in the company.
Is now the right time?
In 2019, real gross domestic product (GDP) rose 2.1%, with some of the main drivers being consumer spending, exports and government spending. Yet, even with this steady growth, business investments decreased, and the outlook points to market compression and tighter margins across sectors. Historically, the GDP growth rate can be a good measure of a country’s economic health, with major events or policies affecting that percentage. If you are considering investing in business improvements or expansions, carefully review your books to ensure you can balance what’s ahead and what you need today.
Assess where you are now
It may take years for your business to become profitable, but once your company generates more than its operating overhead, it may be time to assess where that extra money can be best spent. And, even if your company isn’t experiencing rapid growth, investments may still be necessary, which could require financing support. Evaluate where you are today, your goals for the next year, and beyond.
Conduct a review of your business to identify areas that need bolstering and prioritize opportunities. Is improving your software a nice-to-have or a requirement for meeting customer expectations? If you are struggling to fill open positions due to the tight labor market, should you explore technology options that help increase the productivity of your current workforce? Your reinvestment strategy will be unique to your specific business needs.
Setting a reinvestment strategy
Once you’ve chosen some key areas of focus, determine if they need one-time or recurring investments. Does your inventory plan require frequent—and sometimes unpredictable—adjustments? Will one-time equipment updates last you for a couple years? Do you have enough liquidity now to cover your priority investments, or are loans or lines of credit needed?
When selecting how you will reinvent in your business, it can be effective to narrow in on the capital improvements that can help you manage current challenges. Whether its cash flow, workforce retention, supply/demand volatility or technology advancements, understand how your business strategy, industry outlook and financial plan align. Some common areas of capital reinvestments for businesses include:
Expansion – expanding into new markets, products or locations, or M&A
Marketing – spending more to get in front of your audience
Workforce – hiring and retaining the right people
Technology – implementing efficient and productive solutions, meeting customer expectation
Equipment – maintaining, repairing and purchasing operating equipment
Inventory – building an inventory that aligns with customer demand
How to pay for your reinvestment priorities
If your company is generating a profit, reallocating some of that profit into business investments may be a smart decision, depending on your business plan and goals. If you have a tighter profit margin, you may still be able to allocate funds to investments, but it could require a more strategic approach. Consult with your financial and tax professionals to review your opportunities.
If your company’s profits are already allocated for the year, or you are in a low liquidity industry, business financing is likely the route to take if you need to put money into certain areas. With several types of financing to consider, look for solutions that help now without overleveraging your company or setting you up for challenges down the road. For instance, there are specific loans for equipment, financing that lets you use current assets rather than cash, credit card programs that help with purchasing, and more. Find a balance of profit reallocation, cash flow investing and business lending that helps you reach your business potential for the long-term.
Adam McDiarmid is executive vice president and executive director of the Business Banking division at UMB Bank. In this role, he is responsible for the implementation of the division’s strategic business plan across the footprint, including portfolio growth, performance quality and managing day-to-day operations. He has more than 17 years of experience in the financial services industry. He earned a bachelor’s degree in business from the University of South Carolina.