Congratulations on reaching a profitable stage of your business and achieving such a big milestone. You have surplus profits in the business, and your hard work is finally paying off. But the question is, what next? One of the first thoughts that will cross most business owners' minds is evaluating the salary you pay yourself, which is perfectly fine and you deserve it.

You have come this far, and your efforts have finally paid off, and you deserve to reap the rewards for your dedication and need to pay yourself well to keep yourself motivated. However, don’t let it stop there, as reinvesting your profits may be the key thing that helps you reach that next business milestone and one step closer to your end goal.

If you're considering ways to put your hard-earned gains back into your business, there are many strategic options that can help. Here are five smart methods to reinvest in your business for future success.

Hire Employees or Grow Your Team

It's an exciting point of any business when you are able to grow your team. This can be one of the most impactful investments you can make, as with business growth the demands on your time will increase exponentially. Whether it is bringing in an office manager, an experienced specialist, or a trainee, choosing to expand your team can help manage the demands of the business. This will also allow you to focus on the needs of the business rather than getting bogged down in day-to-day operations.

It’s important when deciding to expand your team and employ new talent, that you calculate into your budget not only the salary you will pay your new hire but also the other financial factors that are part of the cost of hiring additional staff; for example recruitment costs, training and employer’s national insurance contributions, alongside the other hidden costs involved.

Additionally, consider nurturing and investing in your existing team. This may be through paying for further training, professional qualifications and development or internal promotion. Not only will this grow your team but also increase morale and loyalty to the business and its long-term success.

Explore Research and Development Projects (R&D)

Many mistakenly believe R&D is only for the businesses operating in the science and tech industry, which is vastly untrue. Investing in your R&D qualifying projects can be a great way to reinvest extra money available in the business.

Even if your business isn’t traditionally seen as R&D, such as tech and science fields, the guidelines for what qualifies as a project are broad to allow different sectors to reap the benefit of the tax credit. If you are updating your processes, in the midst of creating a new product, solution or knowledge for your business you may be eligible to claim the relief. The key is to identify areas where innovation is a possibility and use it to drive growth and allocate resources to it.

R&D is not just for large companies but can be incredibly lucrative for SMEs. The tax credit allows you a total 186% reduction of your project costs from your annual profits, this reducing the amount of corporation tax you will pay. It can not only give you tax relief but also give you a competitive edge over other competitors by creating, for example, products or processes that they do not have. To be able to claim R&D you will need to submit a claim to HMRC. We advise seeking professional guidance to make the process smoother and compliant.

Upgrade Your Equipment (Leverage the Annual Investment Allowance)

Upgrading your equipment is one of the most impactful ways to reinvest profits into your business. Whether it is modernising your office equipment or a full office refurbishment, improving machinery or investing in vehicles for the business, new equipment can boost productivity, efficiency and your overall competitive edge. Additionally, investing in tangible items that provide long-lasting benefits to your business can qualify for a capital allowance.

This means that some or all of the cost can be used as a tax-deductible item from your profits under the Annual Investment Allowance (AIA). Qualifying assets typically include those falling under the category of 'plant and machinery,' but the term is not restrictive. However, assets for example that are leased or classified for business entertainment are not included. For the tax year 2024, you can deduct up to £1 million from your profits each year before tax is calculated. This makes investing in equipment even more financially attractive, reducing your tax burden while improving your business infrastructure.

Not only will this improve efficiency, but it will also make your business attractive to potential clients, future employees, and investors. Showing that you are committed to maintaining an innovative standard across the business.

Seek Out Investors (SEIS/EIS)

A different avenue of investment for your business is seeking external investors through schemes such as the Seed Enterprise Investment Scheme (SEIS). SEIS is designed to help early-stage companies raise capital, offering up to £150,000 in funding. Raising the necessary capital can be difficult to obtain by companies in their early years although banks and SEIS offer an opportunity to raise funds quickly. The scheme is designed to attract angel investors through significant tax breaks and in return shares in the business. The investor can offset 50% of the total investment of their income tax liability, for the current or previous tax year.

If you're looking to significantly grow your business, seeking external investors can be a great option. While this does mean selling shares of your company, the capital injection can be used to expand rapidly, enter new markets, or finance large-scale projects that can put you ahead of competitors. As well as having the investor's wealth of knowledge to guide you on how best to build your business.

Whilst SEIS is designed to help early-stage companies raise capital, offering up to £250,000 in funding, EIS, on the other hand, is aimed at slightly larger businesses, allowing them to raise up to £1 million per year. These schemes make it easier for businesses to attract investment, which can be used to fuel expansion and innovation without the need to take on debt.

Create an Emergency Buffer by Retaining Surplus Profits

Life and business can be unpredictable, and it's vital to have a ‘rainy day’ set of funds otherwise known as an emergency buffer. This should be included in your business plan. While reinvesting is essential, setting aside surplus profit to be used as an emergency buffer is equally important.

If you ever encounter periods of difficulty, having this resource will be one of the best investments you could have made.

Whilst it is tempting when the business is succeeding to withdraw excess profits as dividends, reinvesting that money into a safety net for your business may be more valuable. This buffer can help you weather difficult periods such as an economic down turn, periods of slower revenue or unexpected expenses. In these situations having a cash reserve could be the difference between staying afloat or having to take out high-interest loans.

In summary, investing in your business is crucial to enhancing growth and creating long-term success. While it's important to reward yourself for your hard work, strategically reinvesting profits can take your business to new heights. Whether this involves expanding your team, exploring R&D opportunities, upgrading equipment, or seeking external investment; each option can bring added benefits. These reinvestments are key to driving continued success and ensuring your business thrives for years to come.

GUEST BLOGGER AUTHOR:

RIDGEFIELD CONSULTING