Investment advice for the small business owner follows similar strategies that individuals should follow with one exception: cash. Although cash flow is the lifeblood of any business, during the early growth stages, survival is the primary focus. Steady growth in sales and a continuous stream of new customers signal that the business has become established. At this point, the owner begins to look for ways to encourage his money to begin to work for him.
Pre-Investment Considerations
Every business owner has unique ideas concerning savings and investment. Dreams of miraculous earnings and few losses rarely materialize in the real world. Hard-earned dollars must be protected from loss through a series of important decisions that guide investment decisions. Each topic must be considered to allow the investor to stay within the bounds of the investment strategy. Answers to important questions will change as time passes, but the investment framework will remain constant.
Debt load – Personal debts and business debts should be separate because the two entities are considered independent taxpayers. Prior to investing money, the debt load should be reduced to long-term debts alone. All short-term debts should be repaid ahead of schedule to prevent straining the cash flow and operational health of the business.
Emergency fund – Six to twelve months of cash should be saved to offset unexpected events that include business recovery, significant loss and all insurance policy deductibles. Expenses should be paid in full prior to initiating the investment plan. Sufficient cash in this fund must be able to cover payroll and operational expenditures during slow sales cycles.
Business goals – Investment mistakes are made when cash is inaccessible because of the instruments selected in the investment plan. Business growth, such as new projects, equipment and expertise, must not be restrained because cash is tied up in long-term investments. Phases of the business life require access to adequate funds in addition to the investment strategy.
Business plan – Five-year business plans require sufficient cash to bring out the targeted events that support and encourage business growth. Funds set aside for investment should not compete with the acquisition of property, equipment, expertise or raw materials required to execute each business plan phase.
Investment advisor – Professionals provide valuable guidance for the investor. Selecting the right investment advisor includes asking some tough questions concerning the payment methods and decision-making processes. Most will say that the investor will make the final selection. Retaining cash for other investments does not bode well with the investment advisor who makes money on commissions from investment instruments.
Investment Guidelines
Good sense is the most important investment strategy anyone can embrace. Wise investment decisions include basic guidelines that prevent losses from ravaging investment savings. Following these strategies will ensure that losses are restrained while steady growth remains possible.
Diversify – Risk tolerance and the number of years to retirement will determine which types of instruments should be in the portfolio. Anyone within 10 years of retirement should avoid placing more than 10 percent of the entire portfolio in stocks. This basic rule prevents potential retirees from experiencing what so many people saw in 2008. Steady earnings in money-market funds and bonds are wise for the older investor who has worked his entire life to save for a comfortable retirement lifestyle.
Beware of concentration – Sale of the business should not be the primary source of retirement funding. Any number of events can occur to reduce the final sales price and prevent the owner from having sufficient cash to reach retirement goals.
Save more – Investors are wise to offset mediocre investment returns through increased savings rates throughout the business year. High sales months should result in greater amounts of cash contributed to the investment strategy. The investment plan should include guidelines for the lowest possible savings percentage during lean times.
Consider mutual funds – Investors might find that mutual funds and exchange-traded funds offer the best balance of risk and return. Large funds are made up of hundreds of stocks where the fund manager places money to increase the fund growth rate. Many investors use these funds as an automatic diversification tool.
Embrace indexing – Securities that reflect an underlying market index, such as the Dow Jones Industrial Average, are another useful investment tool. These mutual funds and E.T.F’s will outperform individual investments since few earn more than the market on a consistent basis.
Manage taxes and fees – Investment strategies must consider the fees associated with trading, selling and accepting distributions during retirement. Taxes and fees can cause the funds to lose more than 30 percent of the value if the investor is not diligent. All prospectus documents will reveal the exact fees and tax requirements for the various investment instruments.
Avoid zero-sum schemes – Forward contracts, options and futures are speculative instruments in which one dollar won has to be lost in another person’s fund. Experienced pros work these instruments while individuals supply the funds.
Reject leverage – Buying an investment “on the margin” is not for the average investor. Losses can be significant if the holdings drop in value. The broker can issues a margin call at any point in time, which requires the investor to have sufficient cash on hand.
Leverage time – Forty years seems like a long time to prepare for comfortable retirement years. By the time the family is grown, more than 20 of those years have passed. The business owner realizes that large amounts of money must be saved every month to build a healthy retirement nest egg. Delays in executing the investment plan can delay the retirement date.
Get Started!
Owning a business can be the most rewarding work in the world. Along with the challenges and hardships comes a plethora of accomplishments that make a difference in the lives of many people. Fruits of that labor take many forms when saving strategies are implemented from the opening day. Small amounts of money should be set aside even when the income barely covers monthly commitments. As sales increase, the savings percentage can grow to support the creation of the emergency fund. Reduction in the debt load will provide substantial funds for initiating the investment plan.
Professional tax and investment advisors are essential in the quest to comply with the laws. Investment plans are essential when the business owner wishes to reduce the tax burden. Planning allows the business owner to dream, but execution of the plan will make dreams come true. Follow the recommendations in this Intro Guide to Investing for Small Businesses to make important decisions and get started on the pathway to financial freedom.
Additional Resources:
5 Essentials of Small Business Investing
How To Choose Business Insurance
