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The early years of a startup can be precarious, leaving you to wonder if you’ll ever hit financial stability. So it’s exciting (not to mention relieving, validating, and so much more) when you start earning a steady profit.
However, having too much cash in the bank isn’t always a good thing. Money sitting idly isn’t helping you increase your profit or grow your business as much as it could be if it was invested elsewhere. But where, exactly, should that money be invested?
Here are a few ways that you can make your small business’s profit do more.
Pay off debt and make a rainy day fund
Debt costs you money in the form of interest, so paying off any debt you have is a good place to start.
From there, before you start investing your profit elsewhere or making major reinvestments into your small business, the first thing you should do with profit is save it in a rainy day fund. The amount that makes sense to save is dictated by your business’s needs, spend, and goals.
Most financial planners will suggest having at least six months of operating expenses squirreled away in a savings account that’s separate from your regular business checking account. High-yield savings accounts are a good option here as are short-term Certificates of Deposit (CDs).
Smart, low-risk investment
Small businesses can use earnings to buy equities or bonds just like any person can. (Equities are shares of another company, commonly referred to as stock, while bonds are a mechanism used by entities, usually governments, when they want to raise money through what are essentially loans). Even S-corp and C-corp businesses can do this.
It’s important to know that any profit generated from equity investments will be taxed as capital gains. Bonds often have some tax exempt elements to them, but they usually offer a lower return on investment. If you’re ready to make external investments, the best place to start is by speaking to a certified public accountant or other tax professional to guide your choices.
Reinvesting in your business
As any savvy business owner knows, the path towards profit isn’t always a direct, one-to-one route. Rather than taking a small payout or making modest capital investments elsewhere, it might make the most sense for you and your business to reinvest in it. Again, this comes down to your business’s unique needs and your goals for it.