In my first year of business with Tailor Skincare, I didn’t make a profit. By year two and onwards, we were consistently making a profit and smart reinvestment of the profits was mission-critical to business growth. Here are the 7 best ways to reinvest business profits:
1. Build Your Team – As your business grows, you’ll need to recruit a team. Hiring staff is one of the biggest investments a business will make. Never underestimate hiring for attitude. It’s important to have key skills and depending on the role, skills can be taught on the job, but attitude is something harder to instill. I’ll lean towards someone who may not have all of the essential skills on day one, but is willing to learn, has the capacity to upskill and has a great attitude about the work. One of my hiring blunders was when a new staff member said, “I’m just not used to doing the ‘doing’”. At that time, I needed someone who could be a strategic thinker, while also operating in the trenches executing strategy. Beware of strategic thinkers whose skills may not translate to the tools. Remember the importance of a good employee contract and if your business is under 19 people, there’s an option to include a 90-day trial period. Making well-considered team structure and hiring decisions will fill your business with rockstars and propel it to the next level.
2. Invest in Your People – It’s not enough to hire someone and call it a day. As your business grows, your people will grow with it. It’s imperative to allocate profits for pay rises, upskilling and regular team-building activities. Make your workplace a fun environment where your team enjoys the day-to-day and feels like their time is being rewarded with career progression. You don’t want anyone looking elsewhere because they’ve hit a ceiling within your organisation. As a general rule, it’s more expensive to replace a team member with someone new than to keep them happy within your business. As a bare minimum, increase their salary by 5 to 15 percent per annum – make sure increases are above inflation and conditional on KPI achievement. Set KPIs together with regular check-ins, to ensure you’re working towards a common goal that’s relevant to business growth.
3. Outsource – Depending on the age and stage of your business, there will be key functions, which make financial sense to outsource. In the beginning, we did everything in-house but as Tailor grew, I focused on outsourcing key business activities and running a lean team in-house. Depending on the age and stage of your business, it might make sense to outsource at one time, then bring back in-house at a later date – do the math and a SWOT to guide your decision. Two key business functions we outsourced were manufacturing and logistics. In the beginning, we made all of our products in-house. We hit a ceiling and to achieve the next level of growth, we needed larger manufacturing capabilities. We either had to invest heavily in our own manufacturing equipment (circa $2.5 million-plus overheads) or contract this service out to a company that made other skincare products. We chose the latter and worked with this trusted partner to successfully scale production, launch new products and grow the business.
4. New Products – New product development is a fun and effective way to invest business profits and grow your future profit. As a rule of thumb for all FMCG-based businesses, a replacement ratio of at least 2 is key. In other words, when you sell one item, you can make at least two more items with the income. For example, you sell X for $10 but it only costs you $5 to make – so you can replace the sold item and make another one with the profits. This is a bare minimum rule and your lowest pricing needs to reflect this rule (i.e. your wholesale price). New product development is exciting! But be sure to stay in your lane and don’t diversify too early. The number of times I’d get asked if I’d thought about shampoo, pet care, a mens range is too large to count. Yes, diversification is a key way to grow the business, but too much diversification can confuse the customer and releasing a product for the sake of it can leave dead stock on the shelf or in the warehouse tying up your capital for long periods of time or ultimately, sinking it into an unrecoverable hole. Launch products, which are going to grow your wallet share, won’t compete with the rest of the product range and have a high consumption rate but will also have a relatively low cost of goods sold (COGS) compared with the Recommended Retail Price RRP, thus increasing your overall profit margin and the speed at which the profits are returned to you.
5. Marketing – Marketing is a key way to reinvest profits. The challenge will be measuring your return on investment (ROI). This can be done via paid digital channels with relative ease, making these channels a sexy first option. Whereas other channels like print and even influencer marketing are harder to measure. The truth is that nothing happens in a vacuum. It’s an accepted rhetoric that a customer needs at least seven touch points before they’re ready to purchase your brand. The more variety of touch points, the more legitimacy the brand has. For example – influencer marketing, paid news feed ads, google display, YouTube, magazine advertising, magazine features, in-store presence, billboards, email marketing, chatbots and word of mouth are all individual touch points. You can hit the same touch point seven times but you’ll likely be leaving $$ on the table as you tap the same audience repeatedly. As your profit affords, it’s in your best interests to grow your customer base by marketing via a variety of digital and physical points, and never underestimate the power of word of mouth advertising, which is free but challenging to organically obtain.
6. Pay it Forward – Be the change you want to see in the world and build this into your business model by donating a proportion of your profits to launch a social enterprise arm of your business. This style of investing is highly regarded as the “right thing to do these days”. But make sure this style of investment is the right thing for your business and after careful consideration, make it a brand-building exercise. It’s a beautiful way to invest your profits but at the end of the day, without a profitable business you can’t invest anything. At Tailor, we used this style of investment as a function of our marketing. For example, we launched a search to find the “Tailor Change Maker” and brought our online community along on the journey to find someone who was making beautiful changes in the world. We then donated some of our business profits to the winner.
7. Lastly, Invest in Yourself – This is NOT selfish. If you’re a small business owner, you will know how integral you are to the business. Plus you may also have staff whose livelihoods rely on you and your business performance. It’s mission-critical to both take time out to sharpen your skill set, so you can come back and be the most efficient version of yourself. The business depends on it.