Why Investment Is Important to Meet Your Financial Goals
One of the questions that I’m often asked by entrepreneurs and small business owners, is if they should invest their business profits outside of their business, or reinvest them into their business. It’s not always a clear-cut decision to make.
How you invest your money depends on your long-run financial goals, risk tolerance, and experience.
In this article, I discuss the importance of investment and look at a few of the best investment options available.
What is investing business profits?
Investing is an activity that is used to generate money from capital assets. Traditionally these include stocks, bonds, and real estate. However, when discussing investing business profits, you might also consider investing directly back into the business and purchasing equipment or stock, or investing in training or marketing.
The key to investing business profits is not just in the investment you make, but how you use the investment. Should you invest your business profits into external assets, or should you reinvest them into your business?
Why is investment important for your business?
Without investment, it would not be possible to establish a business at all. Investment not only allows you to expand your business but also helps you improve and grow your company. It can help you expand your operations, grow your company, and create new revenue sources.
As your business grows, investments will help you develop a solid foundation on which to build, helping you to expand further.
Why should you invest business profits outside of your business?
There are many ways to invest business profits, but the important thing is to invest them in a way that will help you meet your financial goals. Investing outside of your business might seem like an unnecessary risk, but it is an effective way to grow your wealth.
The advantages of investing outside your company are varied, and they offer both short-term and long-term benefits for you. These might include:
- Opportunities for diversification forming a narrow business focus
- Improving your income
- Stabilizing cash flow
- Reducing risk
If you are investing in other businesses, gaining exposure to different industries and access to new skillsets may also help your business.
What are the main investment options for business profits?
There are many asset class options for investment of business profits. These range from traditional to non-traditional investments, and include:
Investing for income via dividends and capital growth via share price gain – that’s what you do when you buy stock or mutual funds. You may use this option to gain exposure to a variety of different business sectors, such as tech, commodities, pharmaceuticals, health, and so on.
You can also invest in stocks to gain exposure to international markets by buying shares in foreign companies. One of the attractions of this type of investment is that it allows you to invest in actively managed mutual funds. Thus, you should benefit from the experience of professional investment management.
To invest in real estate can be a safe investment choice for you, as it not only offers potential high capital gains but also provides a steady stream of income – and everyone needs a home, right?
Bonds are a category of securities that provide a fixed return with fixed risk during the term of the bond. Considered low risk, your capital is usually afforded a level of protection while you also receive income.
You may decide to contribute money to help start new businesses. You’ll receive a stake in the company in which you are investing, though you do need to understand that your capital is at risk and any return is dependent upon the success of the new business.
Bitcoin mining as an investment has become a hot topic in today’s digital era. It has been steadily increasing in popularity. Even if you’re not currently mining, it might be worth considering doing so in the future as mining can provide significant profits.
However, you should also bear in mind that the price of Bitcoin and other digital currencies is highly volatile – the high potential profits come with large potential losses. Cryptocurrencies are a high-risk strategy for investment of business profits.
Why should you reinvest profits into your business?
There are many reasons why you should reinvest your profits into your business. For some, it is a way to show investors that you value their investment and want to grow the company. Others might find it beneficial because they will be able to create more value for their customers or receive higher returns on their investments.
The most common reason is that reinvesting your profits puts money back into your business. This can help increase its value in the future. It also provides funds for making improvements to services and products, which ultimately increases customer satisfaction and overall retention rates. This should help support sales revenues and boost profits as you grow.
While there are many advantages to be gained from reinvesting profits back into business, there are some drawbacks that you should be aware of before making the decision to reinvest. For example, when investing in your own business it is important that you can remain committed and focused on this goal for the long term.
How should you reinvest profits into your business?
There are three ways to reinvest profits into your business: direct, indirect, and return on investment:
- Direct reinvestment means that you use the money you make from selling products or services to help fund the cost of products or services for customers
- Indirect reinvestment is when you invest in another way, such as a new technology tool, a marketing campaign, or by hiring new employees
- The return on investment is when you create an asset that has future benefits for your company and its shareholders – such as investing in developing an app or new product
One ‘investment’ that is often overlooked is paying off debt – yet it could be the best investment you make. Like when paying off a personal loan early, the savings on interest payment to a financial institution could be extremely attractive.
Basically, the higher the interest rate you are paying, the more you should consider paying down debt. The question to ask is, “If I reinvest this money in my business, will it pay me more than I am paying on interest and charges on the debt my business holds?”
Investing in marketing is another option. When you invest in a marketing campaign, your objective should be to sell more products or services. This could produce a very sizeable return on investment. Estimates of ROIs for various types of marketing campaigns vary wildly. Before investing, you should make sure to calculate your expected return to justify the marketing spend.
Finally, hiring more staff into your business could be one of the best decisions that you can make. Higher-skilled people should help you to increase productivity and profitability. At the same time, hiring staff can be a challenge as it requires a lot of time and effort to find the right people for your company.
So, should you start investing outside of your business or reinvest in your business?
The answer to the question of whether you should invest in your business or outside of it is: you should be doing both. If you make the right external investment decisions, you can reap the benefits and move toward your financial goals within your time horizon, if not sooner.
Meanwhile, reinvesting wisely in your business should help it expand sales and improve profits – again helping you meet your financial goals sooner.
Another important aspect of this question is to understand what’s the worst-case scenario for anyone who invests outside of their business. For example, if you invest in a startup that fails, then you are only out on the money that you invested – but your business survives. If you invest all your profits in your company and it fails, then you lose your livelihood. And that’s the worst of all positions to be in.
Would you like to hear more about the best ways to use your investment profits, and how to reach your professional and personal goals faster? To book me for entrepreneurial coaching or for a speaking event, please get in touch.