How to Build a Stronger Business by Not Reinvesting Your Profits

It sounds like a reasonable idea—I’m going to grow my business by reinvesting my profits. But here’s another perspective. When you are starting your business, everything is tight, and you may have a “day job” to cover your personal expenses. Why not put that extra profit aside?

How Reinvesting Your Profits Affects Your Business

The downside to that plan is simply that you are building a business that may come to depend on always having the profits reinvested. If you are familiar with Profit First, you understand that Parkinson’s Law is at work in our everyday life. Simply stated, it means whatever resources are available to you, you will use them.

That means that you will have very little, if any, profits at the end of the day. If you do and you reinvest them in the business, your business will begin to operate with the expectation that those funds will always be available.

Think You’re Ready to Leave Your Day Job?

When the day comes that you decide to leave your day job and begin taking the profits out as salary or owner draw, you will find that you must completely change the way the business operates. You must cut expenses to ensure you have the money for your own pay or profit. You will find the unnecessary expenses, but what about all that time you’ve been paying for them? You could have been operating more frugally from the beginning. You could have been more innovative and more efficient. Why not start out that way?

When you set money aside for your profit and owner pay from the beginning, it sets up the right pressure on your business to operate efficiently. You will develop an innovative culture, looking for the best way to do something and not just throw money at the problem.

Start Setting Aside Profits Now, Not Later

We advise our clients to set that money aside in a bank account as if they were paying themselves. When the day arrives that you strike out on your own, you have some salary set aside to act as a buffer, should you have a lean month.

The business would have been setting this money aside routinely, so you can act confidently and not from a place of fear. You will learn to follow this model repeatedly and set aside the payroll funds before you bring on a new employee. When you hire, you have a buffer for them to help offset the training costs and the ramp-up to productivity.

Let Parkinson’s Law Work for You

It may seem counterintuitive, but setting aside your profits does in fact allow you to build your business from a more solid base. It puts Parkinson’s Law on your side to grow organically.

If you need help getting your Amazon business where you'd like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional and founder of bookskeep, I will explain why Profit First works so well for eCommerce businesses and the particular challenges for businesses that have physical products requiring inventory management.