The Short Answer

What Is Reinvestment?

Reinvestment is putting part of a business’s net earnings back into the business, through equipment, staff, inventory, marketing, or paying down debt, instead of paying it out to the owners.

How to decide how much: check available cash first, fund taxes and your reserve, pay yourself a fair amount, pay down expensive debt, and then fund only the options with a clear payback, best first.

Had a Good Year and Not Sure What to Do Next?

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In Plain English

Putting Profit Back to Work

Reinvestment means putting part of this year’s profit back into the business so it can earn more next year.

A good year brings a hard question: spend it, save it, or put it back into the business? The answer is usually some of each, in the right order.

A Real-World Example

The HVAC Owner Who Trained a Second Technician

Illustrative example

An HVAC company in Phoenix, Arizona clears $90,000 in profit. The owner pays the taxes, funds a reserve, takes a fair share, and pays down a loan.

Then she uses $20,000 to train a second technician. The new tech adds billable hours the next summer, and the owner stops working every call herself. For an HVAC contractor, a trained technician is often the reinvestment with the clearest payback.

From Dr. Paul’s Fabled Forest

Alton the Ant and the Best Year Ever

Doctor Owl was at the general store testing reading lamps when Alton the Ant scurried in, antennae twitching.

“Doc, Anthill and Winding Tunnel Tech Solutions just had its best year ever!” Alton said. “I have two ideas. Spend every coin on new gadgets. Or hide every coin in a tunnel.” He paused. “We need an upgrade!”

Doctor Owl clicked off the lamp. “Neither,” he said kindly. He took a price tag from the counter and drew a pie on the back with four slices: Alton’s pay, the rainy-day jar, his debts, and one upgrade that earns its keep.

“Which upgrade earns its keep?” Alton asked.

“The one that stops you from doing every job yourself.”

Alton thought about it the whole way home. That season, he trained an apprentice.

From Book 2 of Dr. Paul’s Fabled Forest Business School Series, where every business lesson starts with a story.

Dr. Paul’s Insight

Dr. Paul asks clients to show how any reinvestment pays back before they spend a coin of it.

Put It to Work

How to Decide How Much to Reinvest

  1. Check available cash first. Profit on paper is not cash in the bank. Use the lower number.
  2. Fund taxes and the cash reserve. These come out before anything else.
  3. Pay yourself a fair amount. A business that never pays its owner is not a business you can keep running.
  4. Pay down any expensive debt. High-interest debt is often the best return you can get.
  5. List your options and estimate the payback. How long until each one earns back what it costs?
  6. Fund only the options with a clear payback. Best first. Hold the rest until next year.

Sample split (illustrative, $90,000 profit with $90,000 of cash available):

UseAmount
Taxes$25,000
Cash reserve$10,000
Owner pay$30,000
Debt paydown$5,000
Train a second technician$20,000
Total$90,000

Watch Out

Pitfalls When Reinvesting Profit

Watch OutReinvesting before taxes and reserves

The tax bill and the slow month still come.

Watch OutSpending on things that do not earn back

New and shiny is not the same as profitable.

Watch OutNever paying yourself

An owner who is always broke makes worse decisions for the business.

Watch OutReinvesting everything in a slow-growth market

If demand is not growing, more capacity may just sit idle.

Why It Matters

Benefits of Reinvesting With a Plan

  • Growth funded without new debt
  • Clearer priorities
  • Higher business value over time
  • A stronger growth story for lenders

In Your Business Plan

How Reinvestment Shows Up in a Business Plan

Lenders want to know how the business will fund its own growth. A use-of-profits line answers that and shows discipline.

Sample plan excerpt: Growth Strategy, Use of Profits

“Through Year 3, the company plans to retain 30 percent of net profit for reinvestment, focused on technician training and equipment with a payback of under 18 months.”

Keep Learning

Related Lessons

Chapter 18How to Calculate ROI GlossarySmall Business Accounting and Finance Glossary GuideSmall Business Accounting and Finance: 20 Foundations TermWhat Is an Owner’s Draw? TermWhat Is Scenario Planning? GuideShould You Buy or Lease Equipment?

FAQ

Questions Owners Ask About Reinvesting Profit

What percentage of profit should be reinvested?
There is no single right percentage. Many owners reinvest what is left after taxes, a cash reserve, fair owner pay, and expensive debt. Base the amount on the options that have a clear payback, not on a fixed rule.
Is reinvesting profit tax deductible?
Some reinvestment is, such as many business expenses and certain equipment purchases, but the rules depend on what you buy and how your business is taxed. Ask your CPA before you spend with taxes in mind.
Should I reinvest or pay down debt first?
Pay down expensive debt first in most cases. If the debt costs more than your reinvestment is likely to return, paying it off is the better use of the money.

More From the Series

Keep Building Your Business

Every book in Dr. Paul’s Fabled Forest Business School Series teaches one subject through short stories, real terms, and one-page worksheets.

Strategy for Small Businesses book coverBook 6Strategy for Small BusinessesGet it on Amazon → Management and Leadership for Small Businesses book coverBook 1Management and Leadership for Small BusinessesGet it on Amazon → Operations for Small Businesses book coverBook 3Operations for Small BusinessesGet it on Amazon →

Dr. Paul Borosky, DBA, MBA

Dr. Paul is a business consultant and author with 14+ years of experience and 1,000+ written business plans. He works with owner-run small businesses on plans, financial projections, and the systems that let a business run without the owner doing everything. This page is part of the glossary for Accounting and Finance for Small Businesses, Book 2 of Dr. Paul’s Fabled Forest Business School Series.

This page is for general educational purposes only. It is not tax, legal, accounting, or other professional advice. For decisions about your own business, consult a qualified professional.