When you first start a business, your time, energy and resources are focused on growing and building your new venture. However, just as with your personal finances, it’s important to plan and nurture a solid savings strategy for your business.
Regardless of the size of your company, be it a one-person show or a large operation with multiple employees, all business owners share the same goal – to get your money working for you.
After you’ve expended all that hard work and effort and start to see a profit, it’s time to consider how to invest to ensure the greatest return while balancing your risk tolerance and your organization’s need for flexibility and access to funds.
Why build a savings strategy?
Your business may be flourishing today, but there’s always a degree of uncertainty in the future due to many factors beyond your control. Issues with your inventory or suppliers, staffing challenges, the unexpected loss of a key client or a prolonged economic downturn are just a few reasons why you could experience a temporary decrease in business and overall profits. By regularly saving a fixed amount of cash in an accessible savings account or investment, you can build a safety net to protect you and your business to withstand virtually any event.
Once you have your safety net in place and continue to see healthy profits, you can look at investing funds back into your business for growth. You may also wish to take some of this money and invest in investment vehicles that offer potentially higher returns.
Safety net savings
The first step in saving for contingencies is to open a business investment savings account. While the interest rate won’t raise the roof, it’s better than letting the funds sit in your operating account where it typically will earn no interest at all. Here you have the advantage of complete access to your funds should you have an immediate need.
Investing for growth
Once you reach a certain point in your savings, you may be confident to transfer a portion of your savings into a higher-yielding investment vehicle such as a term deposit or guaranteed investment certificate (GIC). You will have a choice of term duration – you may feel comfortable with one or two years – and some term deposits offer the flexibility to cash out without penalty on the anniversary date, allowing greater flexibility.
If you have funds that you can invest longer-term, then you can start building a true business investment portfolio. This likely isn’t the place where you want to take a flyer, and your portfolio should focus on more conservative investment strategies. Stable, flexible investments with conservative growth are a preferred option for the bulk of a business portfolio, with a smaller allocation towards riskier, possibly higher-earning investments for balance. As with personal investing, holding a variety of assets can help protect from any large-scale losses.
Review and adapt
As your business grows and changes, so will your savings and investment requirements. It’s important to review your fund allocation regularly to consider how much you have where, your portfolio asset allocation and your future business plans to ensure you are implementing the right strategy for you and your business.
Just as a business plan sets your company up for success, a solid savings and investment plan will help ensure you are financially prepared for all the ups and downs of running a successful business as well as maximize your profits. Your business advisor will be able to assist you in this regard, and an investment advisor will be key to setting up an effective portfolio when you reach that stage.
For more articles on business and personal financial planning, visit BlueShore Financial.