As a small business owner, any advantage you can carve out for yourself is likely to have a tangible effect on your bottom line. Popular areas to unlock value include cutting operating expenses, negotiating with vendors, and embracing energy efficiency.
That said, one of the most important steps to build wealth and help a burgeoning operation thrive is also one of the most complex; namely, making intelligent investment decisions. Many find the world of investments intimidating due to an abundance of unfamiliar terms and the difficulty of staying rational when money is involved.
Not to worry, though. These three simple tips will help you get the most out of your surplus capital.
The Sooner the Expense, the Safer the Instrument
One of the hardest parts of being an individual investor is keeping your behavior in check. We’re all prone to getting too scared and selling low, or too excited and buying high, when it should be the other way around. In this way, we end up taking on more risk than we need to.
One principle to keep in mind to avoid this mistake is that, the sooner an upcoming business expense, the safer the financial instrument holding the money you’re going to use for it should be. Though you’re giving up the promise of a greater return by investing in a safer instrument, you’re also preserving your capital so you can spend it at the appropriate time.
If the expense has to be paid in less than a year, consider a high-interest savings account that allows you to easily transfer money to the financial institution of your choice. The process is straightforward and you’ll generally have instant access to your money.
If the expense is two to five years away, a short-term bond fund will do just fine. You can introduce stocks to your portfolio from five years onward, but only up to the percentage your goals and risk tolerance will allow.
Optimize Your Capital Structure for the Long Term
Your company’s capital structure refers to how much debt and equity it carries on its books. If your cost of capital is appealing, taking on more leverage can be a reasonable choice. On the other hand, if there’s little reason to believe your business can provide you a return greater than your cost of capital, raising funds from outside backers becomes the better option.
While a payday loan can be a lifeline when there’s nowhere left to turn, a thoroughly constructed business plan should have the foresight to put measures in place to weather any setback. This means being able to fund your business when it’s in need to give it the best chance at a long life.
Aim for Permanent Capital
Permanent capital is money that can stay invested for an unlimited amount of time. In your case, it means getting to a point where your portfolio can fund your business operations every year without any loss of principal. Once you reach that amount, you’ll enjoy the freedom of taking your business in any direction you wish without having to rely on outside interests.
It may take a bit of work at first, but learning about investments can pave the way for your business’ long-term growth with fewer bumps along the way. The takeaway is this: save as much as you can and invest it prudently and your future will be all the brighter for it.