I’m really excited to dive into today’s topic, because how to spend your business profits is a question we all face, and it doesn’t have a clear-cut answer – but today I’m going to give you a framework for reinvesting in your business.
Tell me if this sounds familiar:
One year in, my business was generating about a thousand dollars a month. I still hadn’t quit my “day job,” and I was wondering what exactly to do with that money. Other entrepreneurs would constantly say things like, “You gotta reinvest in your business to grow it faster!” – but I was really unsure about HOW. What specifically should I spend this money on? I was nervous about possibly wasting the profit that I’d been working so hard to earn.
To be honest, this question is still something I struggle with now.
Like I said, there’s no answer that’s going to be one-size-fits-all – but I’m going to lay out six major ways to reinvest. I’ll tell you what I did, and then I’d love to hear your thoughts – you can weigh in at entrepreneursinmotion.com/profits
So here are six main ways to spend your business profits. Keep in mind that I’m not presenting them in any particular order of importance, OK?
#1 – Spend on outsourcing and/or hiring
If you’ve been doing everything yourself, hiring someone to take over some of the tasks can boost your output and free you up to focus on high-impact growth activities.
Do NOT hire just because it’s cheap or “cool”; I see some entrepreneurs hiring VAs just because they can or because everyone seems to be doing it, and they don’t even really know what they want the VA to do.
In my opinion, there are two indicators that you should hire if you want to grow. One is when taking on people will directly allow you to serve more clients – so you’re running some type of agency or productized service, and demand for your service is growing, so you need more people to provide it.
A good example is WPcurve, which provides fixes and tweaks to your WordPress site for a monthly fee – they started with just a few people, and then hired more as they got more and more paying clients. They publish a super-transparent monthly report as well as a lot of other great content, so be sure to check out their blog!
The other indicator that you should probably hire is when so much of your time is taken up by routine stuff that maintains the business, that you have little time or mental bandwidth to work on growing it. Hire someone and train them to do the maintenance, so you can devote your time to higher-level work.
I have a bit of trouble letting go and hiring, but one thing I outsourced was audio editing. I produce a lot of audio content for Espresso English, and the unique value I bring to the table is in coming up with it and voicing it, because my students like my voice. But editing the audio myself was an extra task, time-consuming, and it didn’t need to be me doing it. So I got someone off Elance (which is now Upwork) and nowadays I record my audio, save it in a shared Dropbox, and he completely takes care of the rest.
If you’re trying to figure out if you should hire, here’s a good exercise – manually track your time for a couple weeks while you work on your business. Literally write down everything you do and how long it takes you – then look at it and ask yourself how much is maintenance work vs. growth work, and which tasks do not need to be done by you personally.
We can – and will – devote a whole episode to hiring, but for now I’ll give two tips:
- have specific things you’re hiring for and give the person clear directions. That specificity will help them do their best work and minimize the time you have to spend supervising.
- have a plan for YOUR time that will be freed up. It’s easy to fall into more busywork or micromanaging your hire. But you can prevent that by having specific goals you’re going to work on once your employee is taking care of the routine stuff.
#2 – Invest in better tools
By “better tools,” I mean software, plugins, and equipment that’ll help you deliver a better product/service to your customers.
One of the first major things I upgraded was my hosting. I’d been on Bluehost’s dirt-cheap $4/month plan, but my traffic had grown to the point that my site was loading extremely slowly on that server. So I moved to WPengine, which was $30/month. That may not sound like much, but it was a significant amount of money for me at the time. And it was definitely worth it. My site got faster, my traffic increased, and I also got peace of mind with their automatic nightly backups. So that’s an example of reinvesting in better tools.
Another thing you can reinvest in is your website itself and its design and functionality. I started on a free WordPress template, and about 9 months in I splurged and spent a couple hundred bucks on a better-looking one, as well as a logo from 99designs. And I started to see more sales come in – I think people felt more secure buying from a website that didn’t look completely amateurish.
Some other tools:
- if you’re doing audio or video, you can invest in a better mic or camera
- if you have a lot of success with social media or e-mail marketing, there’s software you can buy to make them more effective
- you can invest in custom development if there’s a feature or functionality that would really add to the user experience on your site
If you’re going to take this route of investing in better tools, beware of “cool new toy” syndrome. Say you’ve got 5 videos up on YouTube; you really don’t need to go buy a $5,000 camera. You can step up these things gradually, and you should think strategically about which tools would truly make an impact in your business.
#3 – Education, consulting, coaching
These are ways of investing in yourself by acquiring knowledge and developing your strategy.
You could invest in a course or a book dealing specifically with an area you’re trying to improve in your business – like how to write better sales pages or how to get the most out of your ad campaigns. The one thing you should watch out for is consuming the info and not acting on it. If you’re going to spend your hard-earned cash on education, do your homework. Learn, and then set aside the time to consciously implement. Set aside a month to do only that – learn and put it into practice.
Alternatively you could hire a consultant to give you some advice. I recommend finding someone who specializes in a certain area as opposed to just “general business,” since this’ll help you get the most bang for your buck initially. Unless you’re at a point where you’re not sure what to focus on, then maybe you’ll need someone with a broader perspective. Clarity.fm is a good place to find consultants of all stripes.
About a year into my business, I scheduled a call with Peter Sandeen to talk about conversion optimization – I was frustrated by the fact that I had a lot of traffic and a sizable list, but few sales. I’ll be honest, it was a bit hard to psych myself up to pay a couple hundred dollars for an hour of someone’s time – probably since I’d never done it before.
But the advice I got was super targeted and actionable; we developed an autoresponder strategy and worked on my messaging as well as the balance of free and paid content. The investment in the consult paid for itself many times over after I implemented his advice.
A third option is coaching, which I’ve never done, so I can’t talk about it from first-hand experience. The only thing I’ll say is that coaching tends to be a more serious investment, so make sure you take it seriously – and again, implement. Your business coach shouldn’t need to hold your hand and pull you along; instead they should challenge you and help you adjust your direction as you’re already in motion.
#4 – Buy traffic (ads)
Reinvesting in ads is a good option if you know your numbers pretty well, and you’re fairly certain that X number of visitors will result in Y number of sales. Then you can do the math and see how much you can afford to spend on ads to get people in the door, knowing that a certain percentage of them will become customers.
If you do this, track your stats. I had a failed ad experiment, and I was SO glad I was tracking because otherwise I’d probably still be pouring money down the drain. Here’s what happened two years ago:
I looked at my e-mail list and calculated the conversion from subscribers to customers, and saw that it was about 2%. The math seemed like it would work, so I started spending $1,000/mo each on Facebook ads and Google ads, driving people to sign up for my e-mail list. I tagged these subscribers with a hidden field marked “ad” so I could see how they converted.
Yes, I got a lot of e-mail sign-ups – but it turned out that the people coming in from ads converted to customers at only about 0.5%, and my products weren’t high-priced enough to come anywhere close to breaking even. So I was just bleeding money on these ads – for every $1,000 I was spending, I’d make back less than $200 in sales. I stopped the ads immediately and I haven’t attempted to try again.
One mistake I definitely made was putting these ad-acquired subscribers into my normal e-mail stream, which is very educational and quite soft on the selling. If I were to do it over, I’d put them in a special e-mail sequence that more strongly encourages a purchase.
The moral of the story is to watch your numbers, and make sure you can at least break even on your ad spend. The businesses that seem to hit it out of the park with ads are those with fairly high-priced products, and those which are monthly subscriptions, so customer LTV is high enough to make the investment in ads pay off.
#5 – Keep some of the profits in the war chest
The “war chest” is basically savings you keep in cash, in your business in reserve for either a major crisis or a major opportunity, such as buying out a competitor.
This is separate from your personal savings. You should have separate bank accounts for yourself and your business – if you don’t, it takes far more discipline and organization to keep things straight.
At some point – it’s impossible to predict when – you’ll face a business disaster for which you’ll need the emergency cash, and the war chest provides for that without you having to draw from your personal account. Or – equally impossible to predict – a huge chance will come along to move your business forward by leaps and bounds, and again you’ll need cash on hand to seize the opportunity.
Regardless of whether you choose to spend on the other things in this list, you should still set aside at least 10% of your profits in the war chest.
#6 – Pay yourself more
Not everyone will agree with me on this one, but it depends on your strategy.
Do you want to push your business forward as fast as humanly possible by reinvesting every dollar?
Or are you comfortable with your business taking a little longer to grow, and you’d rather have the extra money yourself to quit your day job… or save for a house… or travel… or have extra play money… whatever makes you happy?
The benefit of having your own business is that you get to decide. You can also change your strategy based on the phases that your business and life are currently in; there might be seasons where you reinvest aggressively, and others where you enjoy the fruits of your labor.
I personally have tended to be conservative with reinvesting in my business. I don’t like to throw money around in hopes that something will work, and I’m very selective – I try to spend on things that I really believe will make a difference to my business and help it to grow.
If you’ve been unsure about where to spend money in your business, I hope this episode has given you a bit more clarity about some of the possibilities. I’d be interested in hearing how you’ve reinvested in your business – what has worked, what has flopped, what you’re planning on doing next – so head over to www.entrepreneursinmotion.com/profits to leave a comment on this episode.
Enjoy the rest of your week, everyone, and I’ll see you next Wednesday morning.