The Problem

Consider a small but profitable business with 1,000 loyal customers, each paying $10 per month for a recurring service or subscription.

The business is lean, with minimal expenses, and employs one key staff member earning $45,000 annually. The company operates in a growing economy with a 20% corporate tax rate.

• Annual Revenue:

  • Customers: 1,000

  • Monthly Subscription per Customer: $10

  • Total Annual Revenue: $120,000

• Expenses:

  • Employee Salary: $45,000

  • Other Expenses: $10,000

  • Total Expenses: $55,000

• Gross Profit:

  • Gross Profit = Revenue - Expenses = $65,000

    • Gross Profit Margin: 54.17%

  • Net Income (After Tax):

    • Tax Rate: 20%

    • Net Income = Gross Profit × (1 - Tax Rate) = $52,000

The question arises: how much should you reinvest in the business?

While reinvesting 100% may seem valid, it might not be enough to fuel growth.