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Internal, External, or Pension? A Complete Guide on Where to Invest Profits

One of the biggest satisfactions of being your own boss is enjoying the fruits of your hard work. You invest in your business and, if all goes to plan, you get to enjoy the profits that result from it. Once your business starts generating a profit, there come the questions of what you should do with it and where to invest. Should it be re-invested in the business — or will it work best for you elsewhere? Here’s our guide on where to invest your profits

The answer will depend on a number of things; not least, the plans and aspirations you have for your business, your personal financial goals, and your attitude to risk. But by no means is this an ‘either/or’ question: instead of ploughing absolutely everything back into the business, it’s much more common for entrepreneurs to put some back in, while investing the rest in a range of ways, resulting in a balanced and secure investment portfolio.

When it comes to decision time, an independent financial advisor should be able to take a close look at your circumstances and guide you to the right choices. In the meantime, here’s an overview of the investment options open to small business owners, together with an explanation of when and why they might be suitable.

Reinvesting in your business

Usually, the fact that you’ve started to generate a profit is proof that your business is heading in the right direction. On opposite ends of the spectrum, there are two potentially damaging assumptions that you could make at this point:

  • The first is summed up as “if it ain’t broke, don’t fix it?”. It’s the belief that because your business has so far been able to turn a profit with little or no investment, it will automatically go from strength to strength.
  • The second is “the more I put it, the more I’ll get out”. This is where you assume that investment will automatically translate into profit. Both of these can be misguided.

How a business plan can help

This is one of the areas where a business plan can be especially valuable to a small business. Having thought about what you want to achieve, and having researched your market, you use this plan to set out your objectives and how you intend to achieve them.

This approach helps entrepreneurs to make sound, logical business investment decisions. For example, taken in isolation, a decision to take out a lease on a new building, or to purchase a state-of-the-art computer system, might seem almost frivolous. But if your objectives include attracting higher-end clients for more specialist, lucrative work (and if your research tells you that these investments will help you achieve this), the plan makes sense.

A wider picture

You might also choose to invest in your company in a broader sense. Focusing on increasing your spend in areas such as marketing and staff, for instance. Again, the decision to do so should be informed by your business objectives.

So, for example, if your aim of broadening your range of services is likely to be furthered by taking on a highly-skilled employee, the way forward could be to invest by offering an attractive salary package to secure the right person for the job.

Investing externally

External investments can help you on two fronts. They prevent large quantities of surplus cash lying idly and unprofitably in your business account. This is while reducing your exposure to financial risk should your business hit a difficult patch.

What you should aim for

The investments you opt for should be geared primarily towards helping you to achieve your aims. This is in terms of both generating an income (through share dividends or interest on bonds, for instance), as well as capital growth for longer-term security.

At the same time, don’t overlook the potential for external investments to allow you to pursue your broader personal interests, too. For instance, an entrepreneur with a keen interest in the markets might be interested in direct share dealing through a stockbroker. Or perhaps even setting a small amount aside for supporting companies that inspire you, via crowdfunding.

Be mindful of liquidity

Whichever type of external investments are chosen, small business owners should be mindful of the need for ‘liquidity’. This is your ability to access at least part of your investment portfolio at short notice, should an unexpected need arise. Through business budgeting, and by liaising with your accountant, you should get a clear idea of what level of funds to keep at the disposal of the business to avoid cash flow problems.

Investing in a pension

A recent report from the Federation of Small Business showed that fewer than a third of self-employed people save into a pension. With a new business to get off the ground, the temptation might be to plough all of your funds into that. But your long-term needs should be a major consideration for any investment plan — and ideally, a pension should form part of this.

Benefits of pension investments

Pensions are also among the most tax-efficient means of investing. This is because, depending on the plan, they enable you to invest big chunks of your profits, tax-free. Your financial advisor should be able to work with you to help you put together a plan that best suits your needs.

Workplace pension

If and when you register as an employer, you’ll also be guided through the process of setting up a workplace pension for your employees. With these, a percentage of employee pay is put into a qualifying scheme. This is matched by a contribution from you. Currently, the minimum contribution is 1% of qualifying earnings. There’s an opportunity for investment in a broad sense here, too. By offering to make contributions over and above the minimum, it could help you bring top talent on board.

For more information on managing profits and helping your business to grow further, head over to our help centre.

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