Small service-oriented businesses do it. Large product manufacturers do it. And upscale remodeling companies should be doing it, too. It's a strategy known as “reinvesting profits,” and it's something all growing companies should be thinking about — or risk stunting their own growth.
Most businesses have a plan for reinvesting profits to help the company grow, whether by buying equipment, building facilities, or funding new hires. At Newport, Del.–based Rockland Architecture, company president David Heaney says he has been funneling profits back into his high-end residential and commercial remodeling firm since founding it 11 years ago.
“I started with a business plan and the idea of not just creating a job and income for myself but of also building a corporation that could eventually run itself,” says Heaney, who adjusts his annual “reinvestment” according to company performance, but generally reinvests 25% to 50% of profits. As specific company goals have been reached (such as annual sales levels), he has purchased more sophisticated equipment, bought office space, and added employees.
Ted Daniels, president of Daniels Design and Remodeling, in Fairfax, Va., also plows profits into his 10-year-old design/ build company. “I have a long-term vision, and I need capital to make that happen,” says Daniels, who strives to keep overhead expenses low without sacrificing quality or productivity. He pays attention to profit levels, and checks to see if they are high enough to support expenses such as office equipment, automobiles, and employee benefits.
This year, some of those funds are being used to develop and partially fund a retirement program for the company's nine employees. “I want to make sure we have the funds available to match their retirement contributions,” says Daniels, who typically reinvests 100% of his company's profits.
To remodeling businesses that want a piece of the reinvestment action, Heaney says the first step is to determine exactly where you want your company to be. Ask yourself: Where do we see ourselves in two, five, and 10 years? What will the company look like when it reaches that level? Then determine what financial resources you'll need to get there.
“Don't just invest 40% of profits and sit back,” Heaney says. “Instead, come up with a game plan and work backward to figure out how many years it will take to get there, and how much saving and reinvesting you'll have to do to reach your goal.”
Bridget McCrea is a freelance writer based in Dunedin, Fla.