Investing For Businesses

Managing cash flow, accumulating capital and investing that capital are key elements of running a business. Idle cash doesn’t contribute to profits, so it should be invested. That way you’ll earn investment returns that contribute to your business’s bottom line.

But be careful how you invest. Making the right investment decisions will improve your financial future, but wrong decisions can hurt your business. It’s critical to pay attention to your investment time horizons, and how much cash you should commit to short-term and long-term investments. Short-term investments allow you to earn investment returns but still have access to cash when more immediate needs arise. Longer-term investments are more suitable for business goals that are further down the road—such as business expansion. Plus, they generally offer greater returns potential.

Strike a balance

They key is to strike a balance between the money you require to run the business today and the money you have available to invest for future needs. Another critical consideration is security of capital. Most businesses should avoid high risk investments because they can derail business operations or future plans if financial market volatility results in declining investment value. However, that doesn’t mean avoiding risk entirely; the longer your investment horizon, the more short-term volatility you can tolerate.

There is no one-size-fits-all strategy for deciding when and how to make business investments. Your choices will depend on a range of factors. These include the type of business, whether your business is a startup or a mature business, the economic climate and your goals for the future.

How much cash does your business have?

A good starting point is to have a clear idea of what cash is available now, and how much of that cash will be required to run the business today and in the future. This will help you discover what’s left over to invest and explore what portion of those funds should go into short-term investments and how much you can afford to invest for longer terms.

When examining your cash position ask yourself a number of key questions: How much cash does your business have today? What are your projections for incoming revenues? Is your cash flow steady, or does it fluctuate considerably through the year? Are you holding money for customers or clients that can be invested?

How much does your business need?

The other side of the equation is how much cash you need to run your business: What do you require for daily operations? How much of a reserve fund does your business require? Do part of your revenues go toward paying down debt? Will you need to purchase equipment, machinery or other capital goods in the near future? Do you have immediate or long-term expansion plans, and how much will they cost?

After considering these factors, you’ll be in a better position to know how much cash you have available to invest, and how to allocate those investments. Then you can take the next step—developing an investment plan for your business.

A business investment plan is the best way to map out a route to successful investing while ensuring that business finances continue to meet short-term and long-term operating needs.

Not having a suitable investment plan can be costly. Some business owners make the mistake of tying up cash needed to run the business, limiting access to funds when they’re needed. On the other hand, having considerable amounts of cash sitting idle or in low-return investments means you’re missing out on potential returns.

Set goals

With any investment plan, the best place to start is by setting goals. Ask yourself what you want investments to achieve for your business. And consider the level of risk you’re willing to tolerate to realize your goals.

There are many reasons why businesses should invest. For example, your goal might be to build capital for future expansion. You might be planning a major equipment purchase a year or two down the road. Or you might want to maintain cash for emergencies, but still want to earn a competitive rate of return on that money. No matter what your objectives, there are investments to help you reach them.

Time horizons and liquidity needs

Consider, too, that time horizons for different investment objectives will vary. A portion of the money coming into the business should remain readily available. That doesn’t mean it can’t be invested, just that you should choose liquid, secure investments that don’t lock in your funds. For money that can be set aside for longer-term objectives, liquidity may not be as important. By taking all your time horizons into account, it’s possible to structure an overall portfolio that offers the potential of higher returns while giving your business immediate access to funds when required.

Evaluate risk

Risk is another key consideration. Businesses can’t afford to take big chances with money needed for day-to-day operations. However, your business might be able to tolerate increased risk to take advantage of the higher returns potential offered by many longer-term investments. Longer-term investments have more time to recover from temporary volatility in financial markets. Make sure you’re comfortable with the risks you take with business capital and that your strategy won’t do serious harm to your business if things don’t go according to plan.