According to experts, many small business owners are quick to plough their earnings back into their business than invest in another business or investment scheme. Often, entrepreneurs may say they do not have the disposable income to invest, thus making them lack the basic understanding of what it means to invest or diversify one’s portfolio.
As a business owner, it is important to find a balance between reinvesting in your own business and investing in other opportunities, in order to ensure that you diversify your stream of income. To do this effectively, you should have a financial plan that enables you to put a structure on how you spend your earnings. Depending on how much cash you require to run your business monthly you can allocate a percentage to managing your business overhead (which should include paying yourself); another to reinvesting in your business and a percentage for other investment opportunities. The percentage allocated to other investment opportunities can be as low as ten percent, which can be devoted to money or capital market instruments or other future investment plans.
Investing is critical because it helps one hedge against inflation which has a negative effect on savings. Also, it gives entrepreneurs peace of mind and stability knowing that if everything else fails, there are other options of sustaining the business or oneself. As alluded by investment advisors, entrepreneurs need to avoid certain money mistakes and build their company as if it will last forever, while investing personal wealth as if everything will collapse tomorrow. According to Moshe Milevsky, the author of Are You a Stock or a Bond? "when it comes to your portfolio, you should be a little more bond-centric as a hedge against your risky line of business". Some investment options to consider are:
Public or Private equities are securities that enable one to acquire a stake in another organization. Equities are risky investments but yield high returns and are often advised to be held for a long time because they are capital market instruments.
As an entrepreneur seeking to invest in publicly quoted companies (that is companies listed on a stock exchange), you can start with penny stocks (stocks trading between N0.5k and N1) that have high potentials, since they allow you own a larger unit of shares with little amount compared to investing in big-caps. However, it should be noted that penny stocks should not be held for too long; thus, it is often advisable to hold for about one to six months, monitor the price to know when it appreciates and dispose of it to invest in another stock with good prospects. If you are more interested in dividends, you can consider big-cap stocks with a good record of dividend payout, though these stocks are usually more expensive to purchase.
On the other hand, with private equity, you can invest in other people’s businesses within or outside your industry, thereby enabling you to diversify your risk.
These are collective investment schemes that allow investors to pool their funds together to be professionally managed by an asset management firm with a good track record of performance. With mutual funds, your funds can be invested in multiple investment schemes such as T-bills, stocks, bonds, real estate, etc.
Mutual funds are particularly beneficial for investors who do not have the time to monitor activities in various financial markets and you can start with as low as N5000. In addition, you can take advantage of the expertise of these fund managers who are always on top of ensuring that they earn higher returns on their funds.
Treasury Bills (T-Bills)
T-bills as they are often called, are one of the safest investment options available because they have low risks with a fixed interest rate, though inflation could erode your gains from this investment scheme. They are debt instruments issued by the Central Bank on behalf of the Nigerian government to finance a deficit in the budget. Treasury bills can be held for 91days to one year, and they are guaranteed by the Federal Government. There is no default, while income from T-Bills are tax-free.
Investing in T-Bills is also a good option for entrepreneurs to consider because they are short term instruments and can be easily converted to cash. Also, returns from T-Bills are usually at a higher interest than those offered by banks on a savings account; while the T-bills certificate can be used as collateral for bank loans.
Commercial Papers (CPs)
These are unsecured short-term debt instruments issued by corporates to access funds from private individuals, institutional investors, non-governmental organisations, religious bodies etc. to cater to their short-term debt obligations such as working capital needs. They are often issued at a discount for a period of 15 – 270 days.
CPs in Nigeria are often issued by blue-chip corporates with impressive financial performance and they offer investors the opportunity to purchase better yielding instruments than available on risk-free instruments if they are willing to take the calculated risk. Interest earned on CPs is also tax-exempt and certificates issued can be used as collateral or as evidence of investment for visa application.
Beyond the investment schemes discussed above, it is also important to have a pension plan which enables you to enjoy a reasonable income after retirement asides other earnings from your business. Plus, life insurance which protects your beneficiaries and company from financial loss, liabilities or instability in the case of death should be considered.
In conclusion, it is advisable to liaise with a financial advisor who can help structure a balanced portfolio based on your risk profile, cash flow requirements and investment objectives. Essentially, you should take your savings a step further and invest them, to hedge against inflation and any other risk associated with your business.