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 their latest marketing campaigns. And your business BFF just expanded their product line with a big inventory order.
Does this mean it’s time for you to grab new video equipment, brainstorm ad copy, or order more inventory? No—at least, not without a sound business plan.
Whether investing in your small business is something you’re dying to do or something you dread, doing your due diligence ahead of time can help you make the right decision for your business.
In deciding how, when, and whether to invest in your business, you’ll have three main considerations:
- Your business finances
- Your personal finances
- Your goals
With a solid understanding of all three of these factors, you’ll be in a better position than most business owners to make the right calls about how much to invest back in your business.
Learn more: What Does It Really Cost to Start a Business?
Understanding your business’ finances
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, he or she isn’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 of 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 an entrepreneur at the head of 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’re not ready to take out a small business loan, convince investors in your orbit, or approach venture capital firms about raising investment funds, foregoing compensation is a simple solution for self-funding. That’s 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.
Michalowicz divides small business revenue into four categories:
- Owner’s compensation
- Operating expenses
How much of your revenue goes to each category depends on your industry and the size of your business, 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 $4,000 a month in sales—that’s your total revenue.
- 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: $1,600 (to pay yourself)
- Operating expenses: $1,600 (to cover expenses)
- Taxes: $600 (to pay taxes)
- Profits: $200 (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 investment options, but only you can decide which is right for you.
Only you can decide which option is right for you right now.
And yes, the money you set aside for taxes is always off limits. Save yourself unnecessary stress and heartache at tax time by leaving your tax savings alone.
Shopify Capital: Get access to the funds you need to grow
Through Shopify Capital, you get the money you need to grow your business with just a few clicks. There is no lengthy application process and no paper forms to fill out.
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?
Whether you’re using a business loan calculator, thinking about how you’ll spend a loan, or deciding how to allocate your monthly operating expenses budget, you should get a handle on your cash flow before you make any big investment decisions. That way, you won’t find yourself unable to cover your next inventory order because you took a big swing and overspent on a Facebook ad campaign.
Understanding your personal finances
You’re probably thinking, “Wait, isn’t this about my business, not my personal finances?”
You’re right, but your online business exists to make money, and there’s a good chance you’re relying on some of that revenue to pay your bills. Even if your personal financial situation means you’re not depending on your business income, 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’re not just minimizing your investment risk: you can also likely afford to take a lower “salary” from your business income, and instead use those funds to drive business 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
As an entrepreneur, you’re both the salary-giver and the salary-receiver. How much you put into your compensation as business owner 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.
1. Use a budgeting app
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 actually spend, and compare that against your net income.
2. Watch your accounts
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.
3. Account for the unusual
Don’t forget to account for irregular expenses (annual payments, etc.) and emergencies, too. Most financial pros will advise that entrepreneurs have three to six months’ salary saved in an emergency fund, just in case.
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.
At the end of the day, 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
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?
Succuterra’s 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 thread connecting an 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, perhaps you’re selling a complex product (e.g., camera equipment), and think that educational content could help customers get more value from it. Or, maybe you’re 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 small 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?
Tracking your key metrics may mean setting up a custom Google Analytics report, or keeping tabs on how your promotional and transactional emails are performing. Whatever tools or data you’re using, make sure you know what your key performance indicators (KPIs) are ahead of time, and benchmark against where they began before you started spending money.
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 create 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 Jay and Lauren’s financial 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 answer to 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 how your business is doing, 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 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 reevaluate them as needed.
Illustration by Gracia Lam
Invest in your own business FAQ
Can you invest in your own company?
Yes, you can invest in your own company by loaning funds to the company or by purchasing equity. The amount and timing of your investments may vary, depending on your location, so be sure to check with a financial adviser on the best way to invest in your company.
How can I invest in my small business?
Before you invest in your small business, you’ll want to have an understanding of your business finances. Specifically, you’ll want to know how much you can afford to invest, and how much your company is forecasted to make in the next year.
How much can you invest in your own business?
The amount you invest depends on a lot of factors. If your operating expenses are just enough to cover the cost of goods sold and monthly expenses, you may consider reducing your own compensation or temporarily not taking a profit from your business.