The biggest mistakes that business owners can do with their profits is to splurge them away on frivolous things even if they are supposed to be for the company’s use. You do not want to have your money tied up in company equipment or any other inventory that is not bound to translate to income anytime soon. Especially if you are just starting out, you want to be wise in the way you allocate your financial resources. Here are some of the areas that you need to look at in terms of investing wisely:
Revolving Fund – you need to keep enough money as your operational fund. This will include money that you will use for purchasing raw materials, paying for your utility bills, compensating your employees and partners, and any other overhead costs you might have. In bigger companies, money for these expenses is allocated at the start of the fiscal year. Budgets are prepared by the department heads and approved by the executive team and the Board of Directors. The owners, after all, want to be assured that they are investing wisely in the company. Smaller companies can do the same thing, perhaps on a smaller scale if their funds are not sufficient for an entire year’s operations. Having a quarterly budget that is reviewed at the end of period can be workable. The profits achieved for the previous quarter may be reinvested back into the company for the next quarter’s budget.
Contingency Fund – of course, there has to be a provision for emergencies and other necessary expenses that are unbudgeted. Having this fund will provide a safety net for the company so that they will not have to resort to financing options when they run into unplanned expenses. The finance manager of the company, however, should exercise control as to what this fund can be spent on. Going over-budget on some projects should not automatically be a reason to dip into this fund.
Preserving Gains – every investor should be able to recover his investment at some point. While some business owners would think that leaving all their money in the company is a way of investing wisely, this practice exposes their gains to risks. Every business has risks. Business owners will have to take their share of the profits for capital preservation. If they wish, they can leave their share in an account separate from the company’s. When capital infusion is necessary, they can simply reinvest more money.