Every business has one thing in common: the coming and going of money. Even non-profit organizations need money in order to function. When for-profit businesses see their profits accumulate, they may feel uncertain about how to use those profits for maximum benefit.
If your business is achieving consistent earnings in excess of your monthly bills, you might wonder if it’s possible to invest your earnings. This post describes your options and how they may or may not be ideal for your particular business or industry.
A Question Of Permission?
Yes, a business can invest its earnings, and it should. Sometimes there is confusion about what the word “invest” actually means. In terms of personal finance, investment is often discussed in reference to well-known investment opportunities like the stock market, real estate and other financial vehicles that aim to grow wealth over time. However, business investment takes on a broader meaning. You should consider how your business wants to grow when making the decision on how to invest your earnings.
Padding Out An Emergency Fund Of Liquid Assets
An emergency fund is a vital part of a company’s overall financial structure. The purpose of an emergency fund is to cover the cost of a sudden or unexpected expense. For example, if a business loses a major client, an emergency fund can cover the business’ temporary loss of funds.
General wisdom encourages that you should have enough emergency savings to cover at least six months’ worth of business expenses. This suggested figure may differ depending on the business or industry in question.
Investing Back In The Business’ Assets
“Investment” is not as simple as shifting money from one place to another. If your business requires new machinery or tools, you can invest your earnings to purchase upgraded models that improve your workflow.
For example, a café could purchase a state-of-the-art espresso machine that enables them to serve a higher volume of customers at a quicker pace. Investing in your business’s physical assets may develop a reliable cycle of profit growth.
Promoting Improved Workflow And Training
Equipment upgrades and replacements are great, but there are so many investment options that contribute to business success. Even if you are the company’s sole employee, you are just as important—if not more so—than the material objects you use to conduct business.
Investing in yourself and other employees can expand your reach and enhance the efficiency of company processes. Invest in employee training that will boost their knowledge and skill sets or hire new employees to expand departments or develop new but necessary job roles.
Repaying Debt And Financial Obligations
Repayment of debt can build a credit score, but it’s a heavy obligation to bear and could put your business at risk. Pay down debt as fast as possible. You can do this by investing your profits into debt eradication.
If you have business loans or a business credit card balance, using your profits to reduce debt can bring your total assets back into the green. Focus first on debts with the highest interest rates or least favorable terms, and avoid paying only the minimum amount due each month. Most debts will permit overpayment or extra payments, but check with your servicer to confirm.
Utilizing Equities To Increase Gains
A business can even invest their earnings by, well, investing. Depending on the structure of your business (S-corp, LLC, etc.), someone in your company may be eligible to purchase equities where your invested profits can grow over time.
Prepare for the possibility of paying taxes on the capital gains you earn. You may be able to enjoy passive monetary growth by investing your earnings in this manner. A skilled investment advisor can help you understand your tax obligations and eligibility for certain types of investments and financial vehicles.
Trust The Experts To Help You Achieve Your Financial Goals
Whether you are a sole proprietorship or a large company, how you manage your earnings plays a critical role in your business’ ability to expand over time. While you should certainly pay yourself along the way, investing your profits can lead to continued growth. The experts at Inflection Advisors would be happy to help you understand your options and craft a personalized investment plan for your goals. Reach out to learn more or to schedule an appointment.