You’ve researched, applied for and secured the funding you need to get your small business off the ground.
Then, you crunched the numbers a little more and read the research citing that more than 50% of such companies fail within their first year.
There are plenty of ways to solidify your financial future and see your dreams through to fruition. It all begins with understanding and measuring your risks, then taking steps to make sure your long-term vision isn’t compromised by unforeseen circumstances.
Today, we’re diving into the best investment strategy that small business owners can make. This six-step framework can help you succeed in the short-term and grow confidently (and profitably) into the future.
Ready to learn more? Let’s get started.
1. Establish a Safety Net
This is the golden rule of financing and one that most business owners tend to overlook.
If your small business is in a particularly volatile industry that traditionally carries a higher amount of risk, seek to establish a monetary reserve that will see your company through six months of operation or more.
Resist the urge, however, to hold on to way more than you need. Doing so isn’t making the best use of your capital, as it could be reinvested into your business to grow profits.
This way, if a major client fails to pay on time, a huge project falls through or your sales slip to dangerously low levels for a season, your entire infrastructure won’t be compromised.
If you have a safety net in place, you can use that time to proactively restructure and prepare your business for the future rather than anxiously scrambling to make ends meet.
2. Diversify Your Assets
As a business owner, your investment strategy might be to allocate all of your assets toward your company. On the surface, this approach makes sense.
After all, you’re at the helm and in control. You can manage those funds the way you want to and oversee precisely how they’re spent. Yet, keep in mind the inflated concentration of risk you assume by taking this position.
If your business goes under, so does all of the time, energy and money you’ve put into it up to that point. While no one wants to think of that happening, it’s unwise to not prepare for it.
That said, diversification is key to ensuring your long-term financial stability. Investing in outside endeavors isn’t a sign that you’re turning your back on your business. Rather, it’s a money-smart move that can allow you to put more money back into your company in the long run.
Laser-focusing on your own business can make your portfolio inflexible and unable to be successfully liquified. It also makes you more susceptible to setbacks caused by natural economic patterns, such as increases in raw material pricing and shifts in consumer spending habits.
3. Embrace Opportunities Outside Your Industry
When small business owners do work up the gumption to explore opportunities outside of their own startup, they tend to stick fairly close to what they know.
As a savvy investor, this seems to make sense. You know your industry like the back of your hand and as such, are in a position to predict how a peer company will perform within it.
The only downside to taking this approach? If the industry dips, so do all your investments. Companies that are similar in nature tend to exhibit the same performance patterns, meaning that it’s rare for one to stay afloat while all the others around it sink.
Instead, look for opportunities to grow both as a business owner and an investor. Research up-and-coming industries that hold promise, as well as tried-and-true ones, such as healthcare, that are smart investments, even in a shaky economy.
Along the same lines, don’t be afraid to stray outside of your geographical limits, as well. Similar to the group effect you could feel if all your same-industry investments tank, putting all of your eggs in your “local business” basket could lead to the same downfall if your community cannot support them.
4. Consider a Conservative Approach
It’s common for small business owners to take a high-risk, growth-centric approach, especially in their first few years. The reasoning is that if you’re just getting your feet wet and have plenty of time to grow, it’s worth it to chase after earnings as much as possible.
While this can work in the short-term, it can be detrimental to your portfolio and your small business if the market takes a downturn.
Instead, focus on preserving your assets and achieving gradual, steady growth over time rather than making major gains all at once. When you do, you’ll be better able to sustain momentum and growth and you’ll be fortified even against unfavorable market conditions.
5. Reinvest in Your Company
Of course, one of the smartest and most proactive ways to make the best use of your money is to reinvest profits back into it.
There are a few areas that will benefit more from reinvesting than others. Most commonly, business owners will reinvest to improve their business operations. For instance, you might improve and expand upon your infrastructure.
Or, you may use the profits to streamline your manufacturing approach, build up your customer service offerings or invest in newer, better-quality equipment.
Other areas in which you can reinvest include:
- Employee education and training opportunities
- Marketing and advertising campaigns
- More robust benefits package offerings
- Expanding company locations
- External business acquisition
Especially if you’re a relatively new small business, reinvesting might mean taking a pay cut as the owner. Yet, the returns are often more than worth the investment, as you’ll be improving your business from the inside out.
While you’re at it, don’t forget to invest in your personal business journey, as well.
From entrepreneurship training to higher education (such as an MBA program), look into any opportunities that allow you to grow your leadership and management abilities. When you do so, you’ll help fortify your business and improve your oversight and decision-making capabilities.
6. Create a Disaster Recovery Plan
This is akin to your safety net savings but dedicated toward ensuring that your company can continue operation in the event of a disaster. Don’t just assume when the time comes, you’ll have the resources ready.
Instead, invest in taking the time to create a formal plan for recovery. This plan should include purchasing business interruption insurance.
In the event that a fire or other disaster forces your company to leave its premises, this coverage will provide the revenue your business would have earned if you would have stayed.
The amount is based on your financial records and also includes payment for any operating expenses, such as electricity, that continue to run even if you’ve suspended business activities.
Research shows that after a disaster, 40% of small businesses will never resume operation. Put simply, the income loss is just too great.
7. Allocate Funds for Retirement
As a small business owner, you don’t have an employer’s 401(k) to help you save for retirement. That’s why it’s important to take steps now to help ensure you’re able to retire when the time comes.
Even if you plan to sell your small business one day and use those profits to fund your golden years, don’t assume that will be the case. There may be unforeseen circumstances that change that set course of action, or you may overestimate what your business is worth and not have as much as you originally thought you would.
Work with a financial advisor to set up a retirement plan based on your age, savings goals, risk tolerance and long-term outlook. Look for a plan that lets you set money aside into a tax-deferred account so you can help ensure a financially stable retirement.
8. Research Low-Fee Index Funds
You’re a busy business owner, and likely don’t have the time or energy to research and compare stocks and bonds to determine which is the best fit for your portfolio.
In this case, low-fee index funds can be a saving grace. You can set up automatic draft investments into them that allow you to dollar-cost average, maximizing your potential for long-term returns.
Not only does this approach free you up to do other, more mission-critical tasks, it also takes away the urge to check your portfolio’s performance every day or multiple times a day.
You aren’t required to make daily decisions and in turn, you can stay as emotionally removed as possible. Conversely, when you’re in the driver’s seat every day, it can be easy to let your impulses and emotions get the best of you and cloud your judgment.
9. Open a Certificate of Deposit
Ultimately, you have to pay yourself, too. Keeping funds in a business checking or savings account is a common approach for many business owners, but take a look at the interest that these accounts are bringing in. Chances are, it’s minimal at best.
To amplify your interest, look into opening up a Certificate of Deposit (CD). When you do, you’re embracing a low-risk investment opportunity, as well. Your banking institution will routinely offer promotions and make the process as seamless as possible. You can choose between a short-term CD or a long-term one depending on your business needs.
While interest rates for CDs can dip at times, they’re still valuable business assets. They can also be used as collateral in the event that you apply for a corporate credit card. You can qualify for quicker approval this way and help pave the way for more business opportunities.
10. Focus on Advanced Marketing Tactics
One smart way to maximize the use of your business income is to invest it in your marketing department. While this is technically a subset of reinvesting, it deserves its own category because of its time-sensitive nature.
The reality is that digital marketing is sophisticating every day. Relying on outdated outreach techniques can cost your business.
From Search Engine Optimization (SEO) tactics that help boost your company’s visibility in Search Engine Results Pages (SERPs) to new and emerging trends such as Virtual Reality (VR) and Artificial Intelligence (AI), brands are interacting with consumers in new and innovative ways. There’s also a growing need to embrace and excel at social media marketing.
Invest in a team that can keep pace with the changes and help establish your company as an authority in your space. If you’re relying on Facebook Ads or Google AdWords to cover the extent of your marketing, it won’t take long for your target audience to lose interest.
Find the Best Investment Strategy Today
Congratulations! Receiving small business or startup funding is one of the hardest parts of getting your dream off the ground. With the capital in place, you’ve already crossed the biggest hurdle.
Now comes the fun part — deciding where and how to invest that money in ways that will allow it to work the hardest (and smartest) for you and your team.
At the end of the day, the best investment strategy for you will be the one that’s aligned with your unique business vision, the products and services you offer, the size of your team and your goals for the future.
If, along the way, you find that you require more funding, we’re here to help.
We offer flexible term loans perfect for a wide range of business purchases. From new equipment purchases to employee expansion and marketing collateral, if you can visualize it, we can help you cover it.
Apply now and let us walk you through the process. We’re in this together and we’d love to help you grow.