Crack open almost any business book and you’ll likely find plenty of advice on how to make the most of business opportunities and increase your company’s revenue. One topic that gets less coverage, though, is what to do with profit once you’ve earned it. Do you leave it in the company? Do you put it into an RRSP? It can be difficult to prioritize long-term saving over short-term growth opportunities, and ideally, you’ll want to ensure your financial strategy incorporates a balance of investment options.
There is a lot of appeal to investing excess income back into your business, particularly if you’re making enough money to cover your everyday personal needs. Entrepreneurs work hard at creating a viable business and it makes sense for you to invest dollars in your company if you’re already investing so much time.
There is also the allure of higher profits down the road. Why set aside a few dollars now when a small investment in the business might help your company to generate more substantial wealth down the road?
The problem with this type of thinking is that no matter how optimistic you are about the long-term viability of your business, you can never be certain of future performance. Setting some money aside is often an effective way to mitigate risk.
An important factor in determining your level of investment is how close you are to retirement. If retirement is fast approaching, you may want to increase your annual savings in order to meet your financial goals. The trick, of course, is to withdraw just enough money that you won’t starve your business of needed cash.
One way balance the need to feed your business cash against your need to save for retirement is to create an investment strategy for your company. A strategy can help you to determine ahead of time how much profit you would like to funnel into growing the company as well as arrive at a comfortable amount to be earmarked for savings.
You can also develop a similar plan for your retirement needs. This will allow you to examine your plans for business investment and personal retirement side-by-side, which may make it easier to find a suitable balance between the two.
This article is presented for educational purposes only. For any specific financial management or tax-related advice, it’s wise to consult a qualified specialist.
How do you decide what to do with extra cash? Please share your comments in the Get Growing For Business Discussion Group on LinkedIn.
By Roger Pierce, Small Business Expert for Scotiabank
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