15 Smart Investment Strategies for Small Business Owners
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
As a small business owner, you should understand how to invest your capital wisely and how to diversify funds to attain financial stability in your personal life. Additionally, consider strategies such as how to invest in your company’s employees, an emergency fund for your business as well as to hire an accountant. We have 15 smart investment strategies that will help your business and your finances.
Investing in Your Business
1. Invest in a Formal Disaster Recovery Plan
Small business owners should invest in a formal disaster recovery plan and consider business interruption insurance to protect their businesses in the event of an unexpected disaster. Many small business owners lack both a formal disaster recovery plan and business interruption insurance, a key insurance policy that can help pay for operating costs if they’re forced to temporarily close. According to a poll by Insureon conducted with small business resource Manta, 61% of surveyed small businesses lack a disaster recovery plan, while 60% admit that they don’t carry business interruption insurance.
2. Invest in Your Company’s Talent
Each hiring decision your business makes is a change in trajectory, for better or worse. The best investments businesses can make are those that ensure that they’re able to both attract and retain the best person for every position. This can mean investing time to interview candidates thoroughly to find the best possible hire, investing in resources to help train and develop your talent, or investing financial resources to craft an improved compensation and benefits package.
3. Invest in Online Marketing
To help your business grow, it’s important to set aside a portion of your capital for online marketing. Effective online marketing requires knowing your target market and crafting a digital presence that promotes your company. Whether that presence is heavy with digital advertising, social media, email marketing, or a combination of factors, this investment will go a long way, as it allows you a wider reach, and most of your target audience is on the internet.
4. Invest in Product Development
Investing in product improvement and enhancement will increase revenue and profit. Start by looking at the top-selling products your company offers and expand on those offerings. Know your customers’ needs, their pain points, and find a way to address those. It may require a high initial investment and perhaps require some brainstorming, but the return on this investment will be worth it.
5. Invest in Search Engine Optimization
Small businesses should invest in marketing assets that continue to produce revenue for them over the long term. While Google AdWords or Facebook Ads are effective choices for marketing, they’re limited in potential, as a decrease in advertising means a reduction in leads for your business. By contrast, investing in search engine optimization (SEO) has a return on your investment that goes beyond the dollars you pump in. The return on investment for each dollar invested in SEO is about $2.75 on average, with some sectors averaging greater returns. Your site can still rank high for your keywords and you’ll still be getting organic leads from SEO for months or years after any reduction in spending.
6. Hire an Accountant
Don’t do your own accounting. As your business grows, finances become increasingly more complex, which increases the likelihood you’ll spend way too much time trying to make sense of your earnings and expenses in preparation for tax season. Not only is this a way to dodge a guaranteed headache, but it’ll also free up time to grow your business. Invest some of your funds to hire an accountant, and you’ll save yourself from headaches in the long run. If you choose not to hire an accountant, you can still take advantage of these accounting tips to help your business.
7. Build an Emergency Fund
Half of American households lack more than three months in emergency savings. Many businesses have only weeks of reserve cash on hand. If you haven’t done so already, set up emergency fund accounts for your business and yourself. This would prevent the need to touch your longer-term savings or investment accounts whenever you have an urgent need for money. Personal emergency fund uses include medical issues or urgent home repairs; a business emergency fund covers unexpected changes in business operations, such as pandemics or natural disasters.
8. Invest in Yourself & Your Skills
Invest in yourself and in bettering your skills and abilities. You can enroll in some courses that are related to your industry or take certification programs that you may need for your business. You can make many financial investments, yet still risk losing money. When you invest in yourself, you have a better opportunity to improve your business and revenue. You’ll always end up on top investing in yourself.
9. Invest in Property
If your business isn’t planning to move any time in the next several years, consider purchasing a property for your business to operate out of. Purchasing your own property can save you on rental costs and you can use your office on your own terms. Much like residential real estate, commercial properties have appreciated in value over the past decade. When you’re looking for a property, it’s important to consider several factors, including where your employees reside and the company’s future needs.
Investing Your Finances
10. Contribute the Maximum Allowable Amount to Your Retirement
Do your best to contribute the maximum allowable amount each year. With small business and solo 401(k) plans, you can contribute up to $58,000 annually including your own contributions. A SEP IRA works in much the same way but doesn’t involve creating and administering a 401(k) plan. These options all offer some level of tax deferral based on your income and contribution levels for the plan year.
11. Invest in a Certificate of Deposit for Lower Risk
Many savings or checking accounts earn little, if any, interest. If you’re risk-averse, opening a certificate of deposit (CD) is a way to save money at a higher interest rate compared to your regular account, with your CD being insured by the Federal Deposit Insurance Corporation (FDIC). Watch for special promotions from your financial institutions and set up a short- or long-term CD to save money for your business’s future.
12. Consider Series I Savings Bonds
Individuals and businesses can purchase up to $10,000 in Series I savings bonds annually. These bonds are indexed to inflation and have paid out a higher interest rate than many CDs and money market accounts since their inception. Savings bonds need to be held for at least one year and have a three-month interest penalty in years two through five should you need to redeem them. However, they offer a very low risk and solid rate of return and can complement both your corporate and personal savings strategy.
13. Diversify Your Investments Away From Your Business’s Industry
You know your industry well. A smart investment strategy is to avoid the familiarity bias and keep your investments diversified instead of focusing on your field of expertise. One way to accomplish this is to construct a broad portfolio with limited investments in your field of business. A good financial professional can assist you with this, or you can construct it on your own using broad-based index funds or exchange-traded funds (ETFs).
14. Set Up Automatic Investments Into Low-fee Index Funds
A simple and effective investment strategy for small business owners is to set up automatic investments into low-fee index funds. As a business owner, you’re largely preoccupied with your company, and it is unlikely you have time to spare for researching and evaluating specific stocks or bonds. Setting up automatic investments into low-fee index funds can help generate solid long-term returns. This strategy also allows you to stay as emotionless as possible with your investing, because there is no reason to ever look at day-to-day performance, given you aren’t making any day-to-day decisions.
15. Invest in a Financial Advisor
One of the biggest challenges small business owners face is how to manage the fact that much of their net worth can be tied up in their own business. While diversification is a critical part of normal investment strategy, small business owners need to balance both investing in their own business and investing for their retirement. Small business owners should carefully interview a financial advisor to make sure the advisor understands the need to reinvest in the business but also has the expertise to guide the business owner toward investing through the stock market when that provides a better return.
Bottom Line
Smart small business owners invest both their business and personal monies to grow their business, save for emergencies, and help them prepare for retirement. There are several approaches to take that vary in potential risks and rewards. Having an accountant to help manage your business finances and a financial planner to help you plan for the future are wise investments that will pay dividends over the long haul.
