What Percent of income should be invested back into the company

[Ginger]

I have a profitable Window Tinting buisness, that includes automotive commercial and residential.
I have always just taken a salary and put the rest back into the buisness. Because the commercial and residential side was growing I took on a partner. This partner has not invested money, just time and labor. He takes a small weekly salary from the auto side of the buisness, but with the flat glass he wants to split the money from the job 50/50, after the cost of the film. I'm afraid that if we don't put a percentage back or into a savings for the company we will eventually be hurting the company. He says that the automotive should carry itself and feels that the flat should be split. I am still just drawing a salary from the buisness as a whole, and am putting my half back into the buisness account. What percent should be invested back into the company?

[ArcSine]

There's no single plowback percentage that's appropriate for all cases. Optimum reinvestment rates are situation-specific, and are best determined after first running some projections. You might think of it as preparing a budget, but you want your number-crunching to give you a decent read on what the company's cash needs will be over the reasonable future.

Some relevant points...

• Don't tie up excess funds in the biz unnecessarily, if you could make more productive use of the money elsewhere. If a reinvested dollar can generate value in some way (e.g., reduction of business debt to save interest costs; upgrading equipment for better cost efficiency; etc.), then great. But don't build up an excessive balance in a corporate checking account without good cause.

• That said, though, if you're in a business where the cash flow is somewhat volatile and unpredictable, there's a lot to be said for maintaining a nice cushion of "cash padding" in the ol' company cigar box. The need for "safety-net cash" is mitigated a bit, though, to the extent that either you have an untapped credit line you could draw from on a rainy day, or the partners themselves are liquid enough to support the biz with cash infusions should a shortfall arise.

• In general, just keep in mind a basic principle that profits should be reinvested only to the extent that there's a valid business purpose. The purpose might be vague and difficult to quantify (the unpredictability of your profit flow makes some level of "cushion cash" seem appropriate), or black-and-white (reducing your debt until your balance sheet current ratio is X, per your banker's request), but give some thought to what those purposes are, and plan accordingly.

Also, by turning the "reinvestment" question into a thought-and-planning process, it's likely that you'll get better buy-in from your partner on the final decision, since it'll be the result of a logical analytical process, as opposed to a pulled-from-the-air number.

Congrats on the successful business, Ginger, and stay in touch. The experiences and expertise of successful entrepreneurs is most welcome.

[huggytree]

i empty out my business account every December...i leave $10k for operating expenses and put the rest in my pocket...

what do you keep investing into the business for? what do you keep needing? are you growing that fast that you need to keep buying equipment?

if your not making profit why are you in business? a salary is what a worker gets...a business owner gets profit

id put the minimum back into the business and take the profit....enjoy your life

in December i take all the profit....this year i bought a new $40,000 van.....so this year i wont have as much profit to take, but whats there is MINE(and the govt's too)

[BP Writer]

Do I understand correctly - you are splitting gross profits from the non-auto side 50/50, he takes his half out, but you re-invest your half in the business? On the surface that sounds like he is just an employee with a salary plus commission. If he truly wants to be a partner then you will both need to jointly go through the planning process Arcsine outlined and come to a mutually acceptable agreement. I don't know what kind of equity stake he has in the business, but if you are the only one re-investing earnings then that could lead to some real issues down the line (depending on the specifics and particulars of your arrangement). Anyway, it is much better to resolve this now before getting too much further down the road.

[huggytree]

sounds like a typical partnership....doomed to fail

[lacarrye]

I'm afraid that BP writer and huggytree are right. Please, redesign your business structure ASAP. My recommendations; hire a business lawyer with expertise in small business, you will save many the next day. Regards, John