How To Use Your Retained Earnings In Your Business Growth Plan
Major Points of the Article
Retained earnings can be saved for a rainy day. However, you can achieve greater success by leveraging them to grow your business.
Your Business Growth Plan can help you to prepare for the future and needs to be reviewed quarterly.
Knowing what you are planning for in the future will help you to be prepared and more successful when utilising your retained earnings to grow your business.
Often at tax time, you run a few reports to determine how much money you can spend before the end of year, in order to minimize your taxes. However, have you ever thought about what else you can do with your retained earnings to create significant growth in your business?
Firstly, What Are Retained Earnings?
Put simply, your retained earnings is the amount of profit you have left over after paying all of your direct costs, indirect costs, taxes, and any dividends paid to the shareholders.
For some companies, the retained earnings might be small while for others it could be quite large. Whichever yours are, consider leveraging them to create bigger growth for your company.
Why Can't You Leave Them In The Bank
While leaving the spare cash in the bank for a rainy day may seem like a good idea, in most cases, it is not. Cash in the bank losses value with time and what costs $2 to buy 10 years ago would most likely cost more than $4 today, and similarly, growing to $8 at some time in the future. This is called the Time Value of Money and is commonly known in the finance industry.
"Cash loses value the longer it stays as cash..."
In other words, when you underutilise the capacity of your retained earnings then it is losing its value and you are missing out on a tonne of opportunity to grow your business.
Business Growth Plan
Now, you most likely have a business plan that details how you will grow your business.
Did you achieve it? Or were some goals missed? Perhaps you don't have a plan?
If you achieved, didn't achieve, or don't have a plan, then that is ok... because now you can restrategize or create your first plan. In fact, research has shown that a business needs to review its strategy every quarter to pivot and adjust to any changes that might have occurred.
In particular, let's focus on the retained earnings of your business growth plan... because that's what we are talking about. In terms of this factor, there are a tonne of ways for you to accelerate the growth of your business. So what are they?
1. Save Them Up
Now, I know we just described that was the worse thing to do, but in this case, we are not talking about for a rainy day. What we are talking about here is the opportunity for you to save up the retained earnings for a large purchase.
This purchase could be :
a new piece of equipment that helps speed up your team's productivity,
a new piece of equipment that makes a complimentary product that you can sell with your main product line,
or an acquisition. Perhaps you might like to buy another company to merge into your own.
Note: By planning ahead (i.e. in your business growth plan), you can avoid having to get a loan, plus paying the interest that comes with it.
Whichever you choose, factor in how many years it might take to accumulate the cash, how much the item will cost in the future, and then how much money/growth you will achieve from the purchase (i.e. your return on investment, also known as ROI).
Another opportunity to grow your business is to plan an expansion, which can cost money. So where can you get that extra cash to grow your business? Potentially through the current cash flow, but expansions can be expensive in the immediate setup phases, and that is where utilizing your retained earnings can come in handy.
If you want to consider this pathway, then you can use the cash to expand into:
a new state,
a new country,
or even a new industry.
Whichever it is, just remember to factor in how much money it will cost to set up, and how long it will take to reach profitability.
3. Special Projects
This one is quite broad. Essentially, special projects are short-lived that can go for a few months to a few years. It can be a test of a new market, a marketing campaign, the limited release of a product, or anything that will result in the business growing. Whichever it is, it needs to be planned first before being acted on.
4. Research & Development
Often forgotten by most businesses, research and development (R&D) is a way to create exclusive valuable intellectual property that can be released to the market while generating millions to billions of dollars in returns.
So why is it often forgotten in Australian businesses? It is viewed as risky and the risk-adverse nature of most Australians will opt for the low-risk options. However, low risk usually means lower returns. Consider this if you want to create significant growth for your business - be it short-term or as a permanent division of your company.
What Should You Do Next?
A key element in business is that you should be always looking at ways to grow your revenue and your business. Which means taking action on leveraging assets such as your retained earnings by creating, implementing, and reviewing your business growth plan. However, if you don't have time, don't let your business suffer - bring in advisors. That is where Paradelta Strategy can help, as they create short and long-term plans, to then assist you with its implementation. As a plus, we usually find up to 8% in savings that can be used in other areas to grow your business.
In fact, over the years, Paradelta Strategy has helped businesses across Australia to grow and expand, nationally and internationally, and grow significantly in profits. To get assistance with your business, simply email us at firstname.lastname@example.org or schedule a no-obligation discovery call here.