Warren Buffett Knows It. Reinvesting in Your Business Can Lead to Huge Growth. | Entrepreneur (2024)

Warren Buffett's investment career started early and in a somewhat unexpected manner.

One of his early investments was in high school, when he and a friend bought a used pinball machine for $25 and installed in a barbershop. The game proved to be popular with the barbershop's clientele, so the entrepreneurial duo reinvested their profits to buy more pinball machines. In time, they had eight machines in several shops.

Eventually, they sold their venture, and Buffett used his portion of the proceeds to buy stock and then launch another business. By the time he was 26, he'd accrued $174,000 -- or $1.4 million dollars worth of value in today's market.

Related: Learn Warren Buffett's '2 List' Strategy and Master Your Priorities

Undoubtedly the most successful investor of the 20th century recognized the value of reinvesting early on!

Reinvesting is the best way to build wealth. If you're a business owner, reinvesting is crucial to your company's continued growth and success. It's worth keeping in mind that investing isn't just about a sudden influx of cash -- your time and experience are also extremely valuable.

Obviously, Buffett didn't get to where he is today because of a few lucky financial investments -- his ability to choose wisely, and direct finances to the most profitable ventures contributed significantly to his success. If you can apply your time, knowledge and experience in a way that profits your company in the long term, you'll be making a valuable investment.

For any business that's looking to grow, some form of reinvestment is necessary. It doesn't have to be all of your profits, but a significant amount of resources, when targeted effectively can dramatically improve your bottom line. With this in mind, let's look at a few ways that you can expand your business by reinvesting in your company.

How to invest financially.

The first thing that comes to mind when you hear the word "reinvest" is likely a financial reinvestment. Redirecting a portion of profits back into the business can help the establishment to grow and position itself for long-term success.

Most startups need to reinvest heavily. This is because new businesses aren't able to compete on the same level as the big guys. An aggressive expansion strategy is often in order to get the company up to speed and to the point where it's able to enter the marketplace as a serious contender.

The exact amount that you should reinvest will vary. The key is to reinvest based on a strategy, rather than a set percentage. Be strategic, and apply funds in line with your specific development plan and your business needs, but don't invest to the point of cutting other aspects of your company short. Make sure there's enough to cover all of your other expenses.

One common reinvestment is making business improvements. If you're a business owner, then you likely have a list of areas that could be enriched with additional capital. Improving infrastructure, streamlining manufacturing, strengthening customer support, a refined marketing strategy -- these can all directly benefit your business, increase your profits and decrease expenses, and give you more capital to work with.

An investment in marketing will often pay off. I firmly believe the adage that you have to spend money to make money. However, it's important to be smart with your marketing, and continually track the progress of your promotional initiatives.

When embarking on a marketing campaign, quantify the results that you can expect so you will be able to monitor the success of the campaign. Ask yourself how many new leads you expect it to generate, and in turn what increase do you expect to see in your sales?

External acquisitions are another route that some companies can benefit from. In Procter & Gamble's acquisition of Gillette, the acquisition was a success because P&G had stronger sales in some emerging markets and Gillette in others. Together, the companies were stronger and were able to bring products to new markets faster.

It's vital to invest in staff and build a strong workforce. At Renters Warehouse, we recently rolled out a new HR, digital payroll and healthcare offering for our employees to provide them with marketplace discounts, ongoing training and education and substantial healthcare benefits. Take care of your employees and keep them happy. They'll look forward to coming to work, and will be more loyal to your company.

For some situations, it may even be beneficial to take on debt to grow. While this sounds counter-intuitive, when done carefully and in line with a strategic plan for expansion, a loan can be an excellent catalyst for development. In October, Renters Warehouse took on a first of its kind $1,000,000 loan from Central Bank in Minnesota. The funds are being injected into rapid expansion, as well as support for the franchise division. There will also be an investment in marketing and personnel.

This isn't the first time that we've opted for reinvestment in pursuit of an aggressive growth strategy. In early 2014, we re-invested over $150,000 to target and acquire strong franchisees in key markets. Armed with a bold development strategy, we were able to double the total revenue for Renters Warehouse's Franchise Division, and grow our total number of franchises over 100 percent.

A financial reinvestment, applied strategically, can pay off tremendously in terms of long-term development.

Related: The 5 Essentials for Aligning Your Budget With Your Business Strategy

How to invest your time.

Do what you do best, and outsource the rest. -- Peter Drucker

Time is money. Don't underestimate the value of your time. Spending a small percentage of your profits to free yourself up can be a significant investment. Outsourcing administrative tasks and letting someone else tackle customer service, marketing, and bookkeeping allows you to take the time to step back and re-evaluate your goals.

Work on the business, not in it. It also enables you to focus on expanding your company, dedicate time to sales or develop strategies for your future.

Of course, it's also important to be resourceful. When outsourcing, make sure you are doing so only as part of a growth plan. Assign a value to your time and never pay someone more than it would cost you to perform the same tasks. Being creative with ways to save money and cut your losses can also be a great investment -- especially when you are first starting out.

It's essential to spend time networking. One of the most significant investments that you will make in your career is in time spent meeting new people and maintaining current connections. Make time for new customers and reach out to forge new relationships. Networking can help you to build valuable business connections, set you up with new clients, bring in sales leads and can serve as a powerful marketing tool.

How to invest expertise and experience.

As I touched on earlier, your strategy and how well you apply your skills and knowledge are what will ultimately determine the success of your investment.

Investing should always be done carefully, and with clearly-defined goals. It's all about finding the best way to drive your venture forward, and set you up to be more profitable in the long term.

Training and education can also serve as an excellent investment. Training for yourself or your employees can pay off each time new skills are used. Some companies offer apprenticeship programs and in some cases will even pay for their employee's education, in exchange for the employee signing a long-term contract to remain with the company after his or her education is complete. A well-educated workforce can be a significant asset to a company, and smart organizations invest in keeping their employees well trained and up to date on their credentials.

Finally, seek out those with experience and knowledge, and learn from them. Consider investing in a business coach or finding a mentor. Sure, it may cost you something in terms of money and time, but learning from others who have experience can often prove to be an invaluable investment. If you can gain support, time and help from others to scale your business, you'll be significantly ahead.

How do you know which investment will prove to be the most financially viable option? It's important to look at potential opportunities, and then calculate the returns for each one. Also be sure to calculate the risks.

Is there a chance that product optimization won't increase sales? A website redesign may be beneficial, but there's no guarantee that the result will net you more each month. It's a good idea to see what investments have worked for others in the same market as yours.

Once you've identified a strategy that you believe will make the best use of your profits, ensure that you have a plan to track its progress. You can think of this as your RORI, that is, your return on re-investment strategy! Your RORI will allow you to make sure your money is put to the best use and enables you to ensure that the investment was as profitable as projected.

Above all, don't sacrifice long-term investments for short-term rewards. There's nothing worse than missing out on great opportunities because you weren't willing to wait.

How to know when you're ready to reinvest.

Every successful entrepreneur, from Henry Ford to Bill Gates, has made their wealth by investing wisely -- not just as a one-time venture, but as a continual effort. Reallocating profits and other resources back into your business can help you to establish your company as a leading provider of the services or products that you offer. Reinvesting can also help you to set your company on track for continued development.

While many people dislike reinvesting in their companies because they view it as spending money, avoid falling into this mindset trap. Investing isn't about wasting money on unnecessary expenses, it's about applying resources in a strategic manner that will result in higher profits and help you to reach your long-term goals of continued growth and success.

For those who aren't interested in scaling their company or increasing profits -- then investing isn't necessary. But if you're hoping to expand your company and increase your returns, then it's important to reinvest into your business, and to continue to do so for as long as you hope to grow.

What about you? Have you found a strategy for reinvesting in your company? Share your thoughts in the comments section below.

Related: A Good Mentor Can Help Limit the Uncertainty in Your Business