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Why should you invest your business profits?
If your business has had a very profitable year, you may be debating how to best utilise your profits. After distributing salaries to employees and dividends to trustees, there are many options to divide the remaining funds. One option is to increase salaries and pay out more in dividends. However, there is a certain point where it this is no longer tax-efficient.
Another option is to invest your profits. Investing your profits is a form of diversifying your business income, because it allows you to derive funds from multiple sources. This can make your business more resilient to changes in the market, increasing your chance of business success. Experts suggest that you should use the same investing wisdom for business as you do for your personal finances.
One good reason to invest your profits is to generate more funding for your business moving forward. Having available funds may allow you to take on new projects, buy new merchandise and hire new talent.
When planning your investment strategy, you are looking to maximize your potential earnings. Be sure to examine these four factors before investing:
- Risk – likelihood that you can lose your investment
- Liquidity – how easily you can access the cash you invested
- Maturity – duration of your investment
- Yield – what return on investment can be expected
These factors will determine your rate of return. Your specific business model should impact your investing strategy. If you have a lot of capital to spare, you can choose to invest less conservatively. Develop an investment strategy with your business partners and trustees to match your business model and needs.
Can a business invest in shares?
Yes, most businesses can invest in stock shares. As a sole trader, you and your business are legally regarded as one entity. You as an individual are free to invest as you please.
As a limited company, you are generally allowed to buy shares. Before investing, check your specific operating agreement. According to your agreement, either all owners are authorised to make transactions or designated individuals will be authorised. Check the SIC codes to make sure your investment activities fall within the legal limits.
From investing in stocks, you will make money from dividends paid on the shares, and capital appreciation on the share price.
If you do not have time to research individual investments or money to pay a broker, consider purchasing mutual funds. These portfolios come already diversified, so the risk is much lower for the investor.
Can a business buy bonds?
In addition to the shares in your portfolio, it can be smart to invest in bonds. Regarded as lower risk and lower reward to stock shares, the average bond returns 6% a year on your investment. Bonds can be issued by corporations, the UK government or foreign governments. A big benefit of bonds is that you receive back your capital investment at the end of your term. The relationship between interest and bond prices is inverse; as interest rates increase, bond prices fall. There are plenty of different types of bonds to compare, so evaluate the prices and interest rates before purchasing.
High yield bonds, otherwise known as junk bonds are issued by institutions with poor credit ratings. While the ROI is higher than standard bonds, the risk of losing your investment is higher.
What about premium bonds? Premium bonds are bonds trading above their par value (otherwise known as face value). If the average interest on bonds is 5% and a particular bond has 6% interest, investors will bid up the bond until the interest has fallen. Purchasing a premium bond can be a smart investment if you have good timing.
Can a business invest in property?
There are many reasons a business would want to invest in property, either by leasing or buying. Acquiring a new space could help your business expand and gain new customer base. The four main types of business property are offices, retail spaces, industrial properties and leisure properties (including restaurants, pubs, gyms and more).
When purchasing a new location, there are many different factors to acknowledge. Your preferences for a location should be driven by market research and your specific business. For example, a pub may flourish in an area that has too few pubs for the population, or in a district with a vibrant nightlife.
When you are purchasing or leasing a location, consider these factors:
- Transport – How will your customers or employees arrive at your location? Is there a close bus or tube stop?
- Parking – If you are in a suburban area, does your location have adequate access to parking? Can you provide parking vouchers to customers and employees?
- Deliveries – If you are selling merchandise or food, will it be challenging to receive a delivery? Is there a place for the delivery-person to park the truck and unload?
- Congestion – Does your business require foot traffic, or will customers travel to visit? Gift shops, restaurants and pubs often earn customers most effectively in busy areas.
- Proximity to other businesses. Certain business thrive when they are located near to other businesses. Choose your location strategically!
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Are you looking for the funds to grow your business? At Mycashline, we provide fast funding to businesses to get the capital they need. Our quick approval process will get you funds fast, so you can focus on generating profit.