If You Invest In A Small Business How Do You Get Your Money Back

The superstar entrepreneur you follow on Instagram just posted about the new video equipment she bought for her business. Your favorite Facebook group is abuzz about running Facebook ads. And your business BFF just expanded their product line with a big inventory order.

So does that mean it's time for you to grab new video equipment, brainstorm ad copy, or order more inventory? Sorry to be a total buzzkill, but no. At least, not without a plan.

Whether investing in your business is something you're dying to do, or something you approach with a heaping dose of trepidation, doing your due diligence ahead of time can help you make sure you're making the right decision for your business.

There are three main considerations when deciding whether you're ready to invest money back into growing and scaling your business.

Here's what you need to know before investing in your business:

Your business' finances
Your personal finances
Your goals

Once you have a solid understanding of all three, you'll be in a better position to make the right calls about how much to invest back in your business.

Understanding your business' finances

Investing in your business: Understand your business' finances first — Photo courtesy of Burst

Before you choose to invest money into business improvements and opportunities, you need to understand the basics of your business' finances. Specifically, it pays to know:

How much you can reasonably invest
A high-level forecast of your year
A basic understanding of your cash flow

This might feel like you're encroaching into your accountant's territory, but here's a hard truth: while your accountant can be a trusted adviser and even a close confidant, they aren't your CFO. Ultimately, it's up to you to make the most sound financial decisions for your business.

Ultimately, it's up to you to make the most sound financial decisions for your business.

The guidance provided by accountants and financial planners is invaluable in helping you find your bearings, but whether you press pause or go full-steam ahead is your call to make; as a small business, you're still the decision-maker.

How much can you invest?

This is a tricky question, because the answer depends on a lot of factors. If you want to rapidly scale your business, you might forgo paying yourself and pour that money back into new marketing initiatives, which is what Steven Smith did when he was growing Evein Luxury Car Care.

"I didn't take a salary from the company for the first 3 or 4 months, and I reinvested every single penny back into ads and our packaging designs, to make sure we could grow as quickly as possible. After a few months of tweaking our ads for better returns, we were now getting the same income amount for a third of the price—which let us triple our ad spend on the best-performing ads and have massive success."

"If I had taken a salary at the start, we wouldn't have been able to learn and spend money on ads to see what worked"

Not taking any money out of your business to pay yourself isn't an option for everyone, but Steven does present a great point. Money you invest in your business has to come from somewhere.

Money you invest in your business has to come from somewhere.

One of the most approachable frameworks for managing your small business finances, and figuring out where that money will come from, is called Profit First. It's a simple system outlined in the book, Profit First, by Mike Michalowicz.

It breaks down your business' total revenue into four categories:

Owner's Compensation
Operating Expenses
Taxes
Profit

How much of your revenue goes to each category depends on your industry and your business' size, and Michalowicz suggests some easy formulas to follow in the book. Here's an example, with some real numbers.

Let's say your business does $2,000 a month in sales—that's your total revenue.

You're following Profit First, and this is how much you're allocating to each category (based on your business, not the recommended formula):

Owner's Compensation: 40%
Operating Expenses: 40%
Taxes: 15%
Profit: 5%

That means that every month, your account balances would look like this:

Owner's Compensation: $800 (to pay yourself)
Operating Expenses: $800 (to cover expenses)
Taxes: $300 (to pay taxes)
Profit: $100 (to take as profit)

How much you put into each category is flexible, and will depend on the realities of your business. No matter how much you're making, or how you're allocating the percentages, you'll be able to see a clear-cut overview of where cash is going at a high level, and where you could find money to invest if it's right for you.

In the example above, if your operating expenses are just enough to cover your cost of goods sold and your monthly expenses, you won't be able to pull money from there to invest in your business. That means you're looking at either reducing your compensation, or not taking profit from your business right now—both are viable options, but only you can decide which option is right for you right now.

Only you can decide which option is right for you right now.

And yes, your tax savings are always off-limits, which will save you so much stress and heartache at tax time.

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What's your annual forecast?

Now maybe your business is new, growing at a rapid pace, or is at the whim of seasonal swings. In any of those cases, a monthly view of your business might not give you the information you need to make a solid call about your investments.

That's where an annual forecast comes in. This forecasting template is built for seasonal businesses, but it can help you map out your year to get a full picture of what's coming up. It can also help you balance your expenses over the year. If you want to invest in a website redesign in the off-season, that's fine, as long as you do it in the context of your whole year—and don't end up in the red at the end of the year because of it.

How is your cash flow?

Spending money you don't have isn't always off-limits, which is why things like small business loans and investors exist. But in any case, you should always know how much cash you have available, how and when you're planning to spend it, and where you might run into issues. Even if you started a low investment business with a frugal mindset, it doesn't mean your business always has to run on minimal investment.If you are looking for investment or funding to grow your business, check this guide on how to get a business loan .

Whether you're using a business loan calculator, planning out how you'll spend a loan,or how you'll spend your monthly operating expenses budget, getting a handle on your cash flow is something you need to do before you make any big investment decisions. That way, you won't end up without enough money to cover your next inventory order because you took a big swing and overspent on a Facebook ad campaign.

Understanding your personal finances

Investing in your business: Understand your personal finances first — Photo courtesy of Burst

You're probably thinking, "Wait, isn't this about my business, not my personal finances?"

You're right, but your business exists to make money, and some of the money generated might be funds you rely on to live your life. Even if you're not reliant on your business' income on a personal level, that's a good data point to have before you make key decisions about how your sales flow through your business.

Is your business your main source of income?

If it's not, and you have other income to rely on, you'll have more flexibility in terms of how you go about paying yourself. This is one of the perks of using your full-time gig to support your side hustle: you can probably afford to take a lower "salary" from your business income, and instead use that money on new opportunities for growth.

If your business is your main source of income, all is not lost. It just means you need to pay a bit more attention to your personal finances, so that you can make the best decisions for both yourself and your business.

How to set a reasonable salary for yourself

Unlike in a traditional work environment, as an entrepreneur you're both the salary-giver and the salary-receiver. How much you put into owner's compensation is up to you, and this decision will invariably impact how much money is left to reinvest in your business.

That's why figuring out your personal finances is a part of the process you can't skip. If you know how much you need to live on, you won't need to allocate more than that to owner's compensation, and if you're able to significantly reduce your living costs you'll free up money that can go back into the business.

That's how Jay Yi and Lauren McPherson, of Succuterra, approached the intersection of their business' finances and their personal finances.

"Thinking back to when we first started getting into ecommerce, we were extremely frugal and so careful with spending money because everything was new. It's scary to think you could lose money especially when you don't have much, like we did. As for how much we pay ourselves, we take only what we need to maintain the lifestyle we want. Anything extra goes right back into the business to scale."

Here are some ways you can figure out how much your lifestyle really costs.

Start using a budgeting app like Mint or YNAB. By connecting them to your bank accounts and credit cards, you can easily start to see how much you really spend on different things.
Review your last few months of bank statements. Thrilling, right? But the best way to get a sense of your spending patterns is to actually look at them. If you want to figure it out now, not in a few months, this data will be a big help.
Write out a monthly spending plan that makes sense. You might be up for radical changes, like cutting all spending on restaurants, but if not, be honest with yourself and set a plan you can stick to.

Once you know how much you need to spend in a month to maintain the lifestyle you want, that number can inform the salary you pay yourself.

Don't forget to account for things like irregular expenses (annual payments, etc.) and emergencies, too. Most financial pros will advise that as an entrepreneur, you should have three to six months salary saved in an emergency fund just in case.

At the end of the day, all of your financial decisions come down to prioritization, and we're not here to set your priorities for you. Once you have a full understanding of your personal and business finances, you'll be able to make more informed decisions about how you want to use your money to achieve your goals. That's the fun part.

Understanding your goals

Investing in your business: Know your goals first — Photo courtesy of Burst

Now that you've built a solid foundation on numbers, it's time to think about what actually motivates you, otherwise known as your goals.

Once you're ready to invest, planning out where the money goes is the next big challenge. Are you going to invest in more inventory? That fancy new camera to take better photos? Maybe you want to work with a Shopify Expert to level up your store?

For Succuterra, their big move was taking the leap into retail space.

"We started off extremely lean doing things like shipping out of our house and delivering products to the post office by hand, but as the sales grew, we knew we needed to scale. One of the biggest financial 'decisions' we made was to stop fulfilling out of our house and get a retail store. This was a huge step for us and scary as hell, but we just felt we had no other choice. We both worked full-time jobs at the time and we just couldn't maintain what we were doing (working all day then going home and fulfilling orders) if we wanted to scale."

Whatever your goal is, there are a few key criteria you can use to refine an idea into something that's show-me-the-money investment ready.

What's your hypothesis?

Investing in your business should ideally begin with a clear hypothesis. While this can take the form of personal intuition, there should at least be a loose thread connecting the activity to resulting business value. If your potential investment isn't directly linked to sales, just make sure you have an equally clear rationale for it.

For example, are you selling a complex product where educational content could help customers get more value from it (for example, selling camera equipment and teaching customers to take beautiful photographs)? Or are you selling high-end beauty products, and strongly believe influencers are the ideal way to break into the market?

In either case, starting with the business in mind, and linking the activity to the value created for the business, is what makes a hypothesis better than a random guess or haphazard copying of tactics.

What are your key metrics?

It's safe to say you want to see something happen when you spend this money. What part of your business do you think will grow as a result of spending this money, and what numbers can you track to make sure it's really happening? Maybe it's setting up a custom Google Analytics report, maybe it's keeping tabs on how your promotional and transactional emails are performing, but whatever it is, make sure you know your key performance indicators (KPIs) are ahead of time, and benchmark against where they began before you started spending money.

Learn more: ABC Analysis: What to Do With Your Best and Worst Performing Stock

At what point will you reevaluate?

Deciding on anything can be a scary proposition, especially when there's money involved. If you're investing in Facebook ads, it probably means you're passing up other investments you could make in your business. There are potentially dozens of "good" opportunities you'll have to ignore in order to fully commit to your best option.

To keep yourself on track, you can set goals for your key metrics, and set a timeline for reevaluating your decision. Here's how Jay and Lauren at Succuterra did exactly that.

"Although we don't limit our ad spend to a certain budget, we definitely set specific goals in terms of return on advertising spend, or return on investment. Our target is a minimum return of 3:1, but it generally fluctuates between 3:1 and 5:1."

If their return on investment dipped below 3:1—that is, if they weren't earning $3 for every $1 they spent on ads—it would be a clear sign it was time to reevaluate their ad spending.

So is it time to invest?

With all these things to consider, there's no one clear answer about whether it's the right time to invest in your business, or what the best investment is for your specific business. It'll always depend on your business' finances, your personal finances, and your goals.

But it also depends on you.

If you're happy with where your business is at and you aren't particularly interested in scaling right now, that's fine. Not every business needs to grow and scale, and you shouldn't let internet-inspired FOMO convince you otherwise.

If, on the other hand, you're really interested in growing your business, and you have the money to invest? You're now equipped with the information you need to make solid decisions that will benefit your business and re-evaluate them as needed.

Illustration by Gracia Lam