Where to invest your company profits
When you’ve had a good business year, brought in revenue and made a profit, what do you do next? Should you reinvest it in your company, or should you branch out and invest elsewhere?
Here are a few options to make the most of your profitable year — and to hopefully continue on a growth trajectory for years to come.
Create a rainy-day fund
While it’s tempting to invest your company profits and extra cash sitting around in your bank account—and make even more money—make sure you have enough for a rainy day. While business insurance will cover major disasters, you’ll need cash on hand for a slower-than-usual month. So how much of a cash reserve is enough? There’s no one-size-fits-all answer: Consider how much it costs to run your business each month. During a slowdown or even a downturn, how long could you keep the lights on? Do the math and make sure your rainy-day fund can get you through.
Pay down or refinance debt
If you’ve taken out a loan to build your business, you may want to use some of your profits to tackle that debt. One option is to make a lump-sum payment, which would go toward the principle balance, meaning you’ll pay less interest over the lifetime of the loan. If you have a high interest rate, you might want to consider refinancing. Clearly, if you have extra cash on hand, you’re doing something right, and lenders will take notice—so you may be able to refinance at a better rate.
Invest your profits — wisely
Investing your profits in the name of the company is possible, but given the taxation implications of ‘passive income,’ business owners should always consult an accountant first. Your investment strategy must be fine-tuned based on the specificities and complexities of your financial situation.
Informed investing begins with assessing the company’s cash flow and liquidity needs. Start with low-risk, short-term investments to cover immediate needs and, if there’s still money left, plan longer-term investments for later business expansion goals. If you’re in a position to purchase longer-term investments, consider diversifying from your own industry. Consult a financial advisor who is well-versed in the needs of your business.
Invest in your business
While it’s important to diversify your investments, also consider investing in your own business. (Learn from entrepreneur Garrett Gunderson, author of best-selling Killing Sacred Cows, who tells Forbes that cash is your best first investment. As he says, “when you’re low on cash you accept bad clients.”) Investing in your business could mean buying new equipment or technology, for example, to streamline processes or enhance the customer experience.
Maximize business deductions
It makes sense to invest your company profits in equipment, buildings or even land at the end of the fiscal year. “Those purchases can help you maximize your business deductions for the year,” according to an article by the QuickBooks Small Business Centre. But, keep in mind: “If you decide to use the extra cash as a down payment on a lease or mortgage, however, you need to ensure you can afford the extra monthly bills.”
Invest in yourself
Investing in yourself—and your team—is just as important as investing in physical assets. That might mean professional development to grow your subject matter expertise or signing up for leadership or business management workshops. You could also invest those dollars in your workforce, such as providing employee benefits or continuing education opportunities, which would not only improve productivity but also help to reduce turnover.
In some cases, investing in yourself means taking some of the work off your already-full plate. “We all have a dreaded task that sucks some of the joy out of running a business. For some, it’s balancing the books or running payroll.
For others, it’s assessing and tracking the efficacy of marketing campaigns or content creation for the company blog. Fortunately, you can outsource most of these to third parties,” says digital media consultant and investor John Boitnott in a blog for Entrepreneur. If you don’t enjoy it or don’t have time for it, hire someone to do it for you—it will be money well spent.
Plan for the future
Perhaps your business is your retirement plan—you’re hoping to sell the company or live off passive income in your retirement years. But, as the saying goes, hope is not a strategy.
If you’re looking to invest, keep in mind that RRSPs and TFSAs are investment accounts tied to individuals, not companies. So if you want to contribute to an RRSP or TFSA, you would have to pull money out of the business as income or dividends and invest as an individual. If you don’t already have retirement savings, this is an option to consider. Another consideration is to set up an employer-sponsored retirement fund for employees.
No matter what your business or industry, it pays to plan ahead. After all, this year’s profits could turn into a nest egg for the future.
If you’re in business, we’re here to help. ACU’s Community Financial Centre and Business Financial Centre can provide advice and strategic guidance to help you invest your company profits and plan a path for the years ahead. Reach out to your Account Manager or book an appointment today.
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