AFMP4
Syllabus A. Role Of The Senior Financial Adviser A6. Dividend policy in multinationals and transfer pricing

A6ai. The corporation’s short- and long-term reinvestment strategy 2 / 5

Syllabus A6ai)

a) Determine a corporation’s dividend capacity and its policy given:

i) The corporation’s short- and long-term reinvestment strategy

How much of your money should you Reinvest?

There's a lot to consider when you're deciding on your reinvestment strategy.

Smart reinvesting can grow your business quickly, but a poor decision at the wrong time can harm your long-term growth.

So, how much should you keep?

  • aCOWtancy, for example, needs to be able to:

    1. keep a website alive

    2. keep employees paid

    3. keep student service active

    4. invest in development, marketing and more

  • A larger physical business

    has more commitments, from product shipping to leases on warehousing and office space.

  • You can't reinvest money if

    that money is needed to pay your employees or ship your products

Reinvesting is Risky

  1. Less risk - Small profit

    The safest reinvesting options safeguard your money and bring in a small profit. 

    Add a little risk and you'll take away a greater reward.

  2. More risk - bigger profit

    Smart investing relies on the ability to manage risk for the greatest reward.

  3. High risk - No profit?

    Push the risk too high and you may very well end up with nothing.

A Reinvestment Hierarchy

  1. Pay your commitments

    You need to have the cash flow on hand to cover your current commitments and the commitments over the next six months

  2. A reinvestment in yourself

    Training and experiences for yourself and your employees will be a long-term investment that pays off every time some of that knowledge or some of those skills are used.

  3. Reinvesting in your business

    Improving infrastructure and customer support, increasing and refining marketing.

    These all directly benefit your business. 

    They increase your profits and decrease your expenses, potentially giving you more capital to work with.

  4. External investments

    Look at Facebook. FB has purchased many different companies, the most famous of which were Instagram in 2012 and WhatsApp in 2014.