Small businesses should re-invest 9% of profits to succeed, finds new study
A new study, commissioned by business bank Allica Bank has looked to quantify exactly how much UK small businesses should be re-investing to succeed post-Covid. The study analysed data from over 1,000 companies and ranked their success on a scale that evaluated factors including productivity, growth, consistency and outlook.
In the post-pandemic marketplace, businesses will be focusing on recovery plans and survival, but Covid-19 has proved it is more critical than ever to plan for the future. Re-investment may be deprioritised during the crisis, but it is essential for small businesses to grow.
The study found that a quarter of (25%) of small businesses say re-investing profits back in the business is one of the most important factors driving the success of their business. This was the most commonly cited factor driving success identified by business owners, scoring ahead of building an online presence (which 21% selected as part of their top three) and considering new technology (selected by 20%).
Crucially, the study found that small businesses which were ranked as ‘most successful’ by the study, were on average likely to re-invest a higher proportion of their profits into the business. Top-performing firms re-invested an average of 9% of profits into the business, compared to 5% among their less-successful peers. The study also found a strong statistical correlation between levels of investment and year-on-year revenue growth.
Beyond re-investment, the report also highlighted that many small businesses could do more to obtain external credit and financial advice. During the last three years pre-Covid, 65% of the small businesses surveyed hadn’t obtained any credit in order to invest or expand operations and 67% hadn’t sought advice from a financial institution.
The study also found that many small businesses could well benefit from some form of external expertise when it comes to developing their re-investment strategy. Over half (54%) of small businesses have an internal finance team, though this was much less common among smaller businesses. Among businesses with ten employees or fewer, just 20% have a finance team, compared to 88% of businesses with more than fifty employees.
Chris Weller, chief commercial officer, Allica Bank, said:
“Following the Covid pandemic, small businesses are in need of relevant and meaningful advice that will help them get back on their feet and to rebuild their businesses. During this turbulent time, experts have provided plenty of guidance, but it’s critical business owners are offered pragmatic and specialised advice that they can put into action.
“For many small businesses, the next few months will be incredibly tough and the notion of turning a profit, never mind reinvesting one, is a tall order. For these businesses, it is the wider support available in our SME Guide to Success that will be of greatest value in the immediate term. Then, when drafting their longer-play strategies, it is important they fully understand and factor in the value of profit reinvestment.
“Reinvesting profits is often heralded as a ‘silver bullet’ solution for SMEs but until now there has been no clarity for business owners on what this actually means. How much profit? And is this assumed fact actually true? Is there any real benefit in profit reinvestment? With this study we are proud to have established a clear link between reinvestment and businesses’ prospects of success; furthermore we have quantified that 9% is the magic number for maximising an SME’s chances of achieving their goals.
“At Allica Bank, we have created a Guide to Success for SMEs, with workshops and actionable insight that will be of value to all types of small business.
Andy Collier from the FD Centre, which is partnering with Allica Bank to deliver a free workshop on the findings for small businesses, said:
“Re-investing in the business should be an essential part of any small business’ growth strategy: re-investment is a catalyst for faster growth. Depending on the size of the company, small businesses don’t necessarily need an internal financial team to manage the process. In fact, this expertise can be brought in part-time or piecemeal, to provide exactly the solutions SMEs need. These days, it’s entirely feasible for a small business to employ a ‘mini’ finance department constituting purely the resource required for the company’s unique situation and for a fraction of the cost of requiring full time resources.
“The first thing small business owners should do is identify what the current issues are and the aims of the business. Going to talk to an expert is a good place to start, they will be able to audit the business and recommend a menu of options. The needs of every small business are different, but putting in the time to develop a tailored and strategic re-investment strategy will undoubtedly make the business more efficient. There are lots of routes to success, but it’s important that small businesses know they don’t have to go it alone.”
Allica Bank’s SME Guide to Success identified six ‘rules to success’ that were more likely to be displayed by top-performing SMEs compared to their counterparts. The full report contains a wealth of additional data and insight into each of these topics. As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.