Last updated on December 7th, 2022
As both a digital marketer and as a business owner myself, I am more than happy to discuss topics like SEO and automation. I’ve also talked with others on more difficult topics like finances and investments.
A lot of business owners like to ask me what I do with my business’s profits and how I invest them. So, here are my experiences with business investing.
Disclaimer: I am not an investment advisor and, just like with all my other finance-based articles, I won’t be giving investment advice. Here is just my personal approach to investing as a business.
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I Cover My Costs First
Running a business costs money, and a lot of the money your business generates needs to go to cover your expenses.
A CBInsights report found that 29% of businesses fail because they run out of money and finances is a main concern for most small businesses (particularly around issues relating to inflation and revenue).
This is understandable considering that only 40% of US small businesses have their financing needs met. As a result, I’ve often seen business owners try to jump the gun by investing before their costs are completely covered.
This is incredibly risky behavior and something that doesn’t always pay off (more on short-term investments later).
So, I always cover my costs. If a project is not as successful (see also, ‘What Are the Guiding Principles for Ultimate CRM Success?‘) as I had hoped, then at least I won’t walk away with any debt. 70% of US small businesses have outstanding debt and that can hold you back from future projects – so I try to limit as much of my debt as possible.
I Avoid ‘Fast’ Investing
Firstly, I want to talk about fast or short-term investments.
I’ve met a lot of people who want to grow their money quickly so they have more funds to sink into their business. As a result, they invest their profits and funds into short-term investments – but in my opinion, this is an extremely risky move.
Short-term investments involve a lot of speculation and risks. Because you are trying to quickly buy and sell assets for a profit, you need to really try to evaluate the market (see also, ‘What Are the Best Niches for Affiliate Marketing?‘) and predict what kind of state it will be in a few months to a year down the line.
Considering that investors have a bad reputation when it comes to timing markets with their investments, this means that short-term investing is even more risky.
This results in massive losses seen in short-term investments due to factors like high costs, high taxes, and inflation.
This can clearly be seen in this study by Schroders. Here, investments in the S&P 500 for only a month saw that 40% lost money.
The longer the investors invested for, the less of them saw losses. This clearly shows that long-term investments are much safer for growing money.
Based on all this information, I avoid fast investing as a business. I want to get the most out of my profits and I am not willing to gamble it away.
My Main Investing Solutions
I go into depth into my main investing solutions in another article, but I think it’s appropriate to quickly mention them here.
I personally always opt for long-term investments. I have found many reports which show that long-term investments lead to better return rates and the longer you invest money for, the less likely you are to make a loss. So, I usually stick to long-term investment options for these reasons.
My two main choices are Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs).
I use ETFs due to their lower investment costs and lower tax rates. Apparently, I’m not the only one – a survey from 2020 showed that 60% of people thought that the low investment costs of ETFs were their most important attribute.
As for REITs, I find them to be reliable in their ability to provide investors like me with a steady income over time. They also have a great return rate as they were responsible for providing nearly $89 billion in dividend income in 2020 alone.
Although these are my personal solutions when it comes to investing as a business, I think it’s worth mentioning that I am not the only one who prefers investing in securities.
It’s common knowledge that businesses prefer investing in securities. Not only do they provide better returns for more funding, but they also help diversify portfolios and offer a lot of tax advantages businesses can benefit from.
Reinvest In Your Business
There is another way I ‘invest’ my business’s profits. Other than stocks and securities, I also reinvest a lot of my business’s profits back into them instead of simply holding it somewhere or drawing it out as part of my income.
77% of businesses use their earnings as their primary source of funding. This means that most businesses reinvest their profits back into their business to help keep it growing. This is a type of corporate investing (even though you are not investing in another company).
Experts recommend that businesses follow the 50-30-20 model when it comes to their business profits.
It’s a rule that a lot of people follow to help them budget their post-tax income but it can also be used to help businesses guide their profit spending.
It works by suggesting that businesses spend 50% of their profits on themselves as a part of their income, 30% to taxes, and 20% for reinvesting in their business.
This means that businesses should aim to spend 20% of their profits on things like marketing, equipment, product development, and more. All of these things can help your business grow even more by channeling a little extra funding to them.
I myself try to follow the 50-30-20 model when it comes to my profits, although I don’t mind taking a ‘pay cut’ by sinking more profits back into my business.
I’ve found that it definitely helps me cover a lot more costs so I can try more adventurous marketing strategies or spend on useful digital tools to help make me work more efficiently.
Final Thoughts
As a business owner, I know how tempting it is to pull your profits and spend it as your income, but it’s important to think wisely about where you are going to do with them.
While saving for a rainy day is always a great choice, I like to try investing my profits to boost my funds.
Personally, I prefer long-term investments like ETFs and REITs because of their low costs and low risks – especially when compared to risky short-term investments which usually end in losses.
However, I also try to invest back into my business so I can provide more funding to help it grow.
Money really does make the world go around and if you want your business to grow and succeed, it requires more funding – and most businesses use their profits to achieve this.
Of course, these are all my thoughts and opinions on investing as a business. I’d recommend you talk to a financial advisor before making any investing decisions with your business’s profits.
