As a business owner, you must understand that a business creates value for its shareholders when it can grow and earn a return on invested capital greater than the cost of that capital.
As an entrepreneur, you have to find ways of investing business money to create significant, long-term shareholder value. In other words, your shareholders and yourself have to earn a greater risk-adjusted return than they would if they invested elsewhere.
If you cannot do this, you must return the company’s profits to your shareholders in the form of dividends or share buybacks.
Rules & Tips For Investing Business Money
The Securities and Exchange Commission advises new investors to educate themselves about saving and investing, do background research on your broker or advisor’s record and adherence to regulations, and research their investment opportunities.
Every investment decision that your business takes must have its organizing principle, the creation of long-term shareholder value. Whether you are reinvesting in your business, investing in stocks, bonds, indices, real estate, or other private companies, this must remain your guide.
There is strong evidence that managing long-term value creation delivers superior results, not just to shareholders but also to stakeholders. Fundamentally, you eschew short-term thinking in favor of a long-term horizon.
Long-term investment results reflect the quality of the decision-making process of management. In many cases, managers do not have an explicit decision-making framework. Embrace the use of decision trees in a straightforward decision-making process so that most of your decisions fall in your favor.
7 Ways To Invest Business Money
The universe of investable ideas is vast, and from this universe, you have to find the investment opportunities that create the most risk-adjusted shareholder value.
1. Reinvest In Your Business
If you have objective reasons to believe that your business’s risk-adjusted returns match what you could get outside of the company and that your business’s market opportunity is big enough to absorb the new cash that you throw at it effectively.
2. Invest in a Stock Market Indices
Investing in a broad-market index fund such as Warren Buffett-recommended Vanguard 500 Index Fund Admiral Shares, or specialized funds such as the BVP Nasdaq Emerging Cloud Index, gives investors exposure to a broad group of companies, at a meager cost, and in some cases, zero-cost.
Index funds free you from the business of actively managing your investors and leave you with one key role: investing with a long-term horizon.
3. Invest in Small Businesses
Depending on the size of your business’ profits, deploying that capital into other small businesses may be an attractive option.
You can do this by investing in a Small Business Administration licensed Small Business Investment Company or joining crowdfunding platforms such as Kickstarter, Indiegogo, and Angellist.
4. Invest in Real Estate
The land has a finite supply, which means that as the world’s population grows, the demand for land rises, along with it, the price of land.
House prices have been rising for decades, and agricultural land values have soared. Remote work has killed the giant office complex, but in its place, small satellite offices have become important as businesses embrace distributed teams. You can invest in real estate directly or through a real estate investment trust.
5. Invest in Bonds
With the Federal Reserve telegraphing to raise interest rates this year, government and corporate bonds will finally begin to earn investors a good yield.
Investing in a range of bonds with different maturities would give your business a more predictable cash flow.
6. Build Up Your Cash Flow
Nassim Taleb likes to talk about the importance of optionality. The optionality of holding cash gives you the ability to buy assets at a discount to their value or protect your business when a crisis hits.
From Apple to Zoom, many businesses retain their cash flow as a buffer against uncertainty and for use in future strategic deals.
7. Do Mergers & Acquisitions Deals
This is different from investing in other small businesses because, with an M&A, the idea is not just to invest in a business you will have no other relationship with; it is to build your core business by making strategic M&A deals.
This may involve dealing with a company with assets such as intellectual property your business needs or which has competencies or networks that would help build value for your business.
Benefits Of Investing Business Money
Investing business money is done with some end in mind. As a manager allocating capital, you have to have clear ideas about what kind of return you want, the types of investments you are competent to understand, and the styles of risks you are willing to accept. Everything must be done to service your goal.
- Investing business money brings you closer toward achieving your goal of creating shareholder value. If a deal doesn’t make sense from a shareholder value perspective, it should be done.
- It can stabilize your cash flows and de-risk your business.
- Investing can also protect your business against future crisis and uncertainty and prepare you to take advantage of market downturns.
- By investing, your business can secure key assets, from land to intellectual property, that make your business stronger.
Summary
Management exists to create shareholder value. Therefore, all capital allocation decisions must be based on this crucial concept. Your investable universe starts with your own business and encompasses stocks in public and private companies, M&A deals, bonds, cash, and equivalents, as well as investing in bonds and real estate. As a result, you will de-risk your business and increase your optionality along your investment journey.
