There's nothing like the satisfaction that comes from growing healthy profit margins in your small business. If you've reached the stage in your business lifecycle where your revenue exceeds your expenses, congratulations! Your hard work is paying off.
However, there is such a thing as “too much” profit, such as having excess funds in your bank account that you can use to generate additional income.
“By leaving cash idle, companies miss out on the opportunity to generate additional revenue,” writes Small Business Chronicle. “So the biggest drawback of having too much cash on hand is that it reduces return on assets.”
If you have money left over in your small business bank account, there are a few ways you can invest it. However, these investment options have tax and other business implications. Here's what you need to know about investing your small business profits.
What are some ways to invest your small business profits?
Just as there are many ways to invest your personal assets, there are also many ways to invest the profits of your business. Each carries different levels of risk and potential rewards. Here are some examples of what you can invest in:
[Read more: One Quarter of Small Businesses Plan to Reinvest in their Enterprise]
Rainy day fund
Some experts recommend building up savings as an emergency or contingency fund before broadening your investment horizon to any of the options listed below: Most experts suggest building up six months' worth of operating expenses separate from your regular business account.
To build up an emergency fund, consider transferring cash from your company checking account into another, lower-risk financial instrument. “For best results, small business owners should look for safe savings and investment options that can be cashed out with little to no notice,” says Quickbooks. “Low-risk municipal bonds and short-term CDs (certificates of deposit) are generally considered good options.”
If you're not familiar with bonds and CDs, talk to your bank about opening a small business savings account.
By leaving cash sitting idle, a company misses out on the opportunity to generate additional profits.
Small Business Chronicle
Pay off existing debt
Secondly, many business owners will borrow money at some point in their business lifecycle to get their business off the ground or to expand into new markets. If this is your first business, the interest rates may be relatively high. Any excess profits can be used to refinance or pay off some of your existing debt, saving you money in the long run. However, if interest rates are favorable, it may be a good idea to invest your earnings elsewhere to optimize how you use your profits.
Marketing or employee training
One way to leverage profits is to reinvest them back into your business. For example, many business owners use revenue to attract new customers through marketing campaigns and advertising. Others invest in their employees in training and professional development. Both options are low-risk, potentially high-reward ways to build on existing success.
Buying new equipment
Purchasing new equipment can help your business grow and reduce your tax burden at the end of the year. Maybe you want a new espresso maker for your café or give your employees new headsets for working from home. Purchasing assets should help you serve your customers, operate more efficiently, and grow your business.
[Read more: A Complete Guide to Filing Your Business Taxes]
Stocks or bonds
Finally, small businesses can use business profits to buy stocks or bonds. How they do this depends on how the business is structured. “An LLC's operating agreement can give one of the owners/managers the authority to purchase stock on the company's behalf, or it can give this authority to some or all of the parties involved,” explains The Motley Fool.
S corporations and C corporations can also buy stocks, but keep in mind that they are taxed on capital gains. Bonds are lower risk but also generally offer lower returns. Consult a tax professional who can help you understand the financial obligations you may face, both as an individual and as a corporation, by investing your company's earnings in stocks or bonds.
CO— aims to provide inspiration from leading, respected experts. However, before making any business decisions, you should consult with an expert who can advise you based on your individual circumstances.
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