Your business is doing great. The coffers are full. There’s just one question; what should you do with all the extra money? If your business has extra cash, there are several ways you may want to invest it.
1. Establish Cash Reserves
As a small business owner, you need cash savings to ensure you have enough money to cover payroll and bills if revenue wanes. To estimate how much cash you should set aside, imagine revenues falling by 25% and expenses increasing by 50%. Then, calculate the amount of extra cash you need to get through that type of scenario for a few months.
2. Invest in Your Business
Although a cash cushion is critical, you should always invest as much cash as possible back into your business. Depending on your objectives, you may want to develop a new product, improve an existing product, expand your marketing reach, or invest in your staff through bonuses or extra training programs. Ultimately, any investment you make in your business should potentially improve cash flow down the road.
3. Maximize Capital Expenditures
Alternatively, you may want to invest excess cash into capital expenditures. In particular, if you have excess cash at the end of the fiscal year, you may want to buy buildings, land, or equipment. Those purchases can help you maximize your business deductions for the year.
If you decide to use the extra cash as a down payment on a lease or mortgage, however, you need to ensure you can afford the extra monthly bills. You don’t want to inadvertently tie yourself to fixed costs that are impossible to maintain.
4. Buy Another Business
Instead of investing in your own business, you may want to consider buying another business. If you’re ready to diversify, you may want to buy an existing business that is different from yours. To make the process easier, look for a business with an established client base and well-trained management team. Conversely, if you want to increase your share of the market, you may want to buy a competitor and rebrand that business as yours. In other cases, you may want to consider buying shares in a small business. This approach allows you to create a financial stake without worrying about the day-to-day operations. As an added bonus, small business corporation shares are eligible for a capital gains deduction up to a generous limit. By extension, if you invest in a small business and sell the shares at a profit, you may not have to pay tax on the gain.
5. Set Up Retirement Accounts
If you don’t have a personal retirement account, you may want to use your excess funds to establish one. As of 2017, the Canada Revenue Agency allows you to contribute up to 18% of your income or a maximum $26,010 to your RRSP annually. If you haven’t made your full contributions from previous years, your annual limit may be even higher.
If your nest egg is already well established, you may want to talk with an advisor about setting up a retirement account for your employees. An employer sponsored fund can be an effective tool for retaining existing employees and attracting new ones.