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How To Identify A Good Investment Vs. Speculative Spending For Your Small Business

I'm the owner and founder of PIT Designs. I love creating digital presence and creative digital solutions for our clients.

Posted 2 months ago on March 23rd, 2022. Last modified on March 25th, 2022

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When your small business is making a decent profit and you have surplus cash, you may want to invest it. But how do you know what will give you the best ROI? There are several different investment opportunities for businesses to explore, so we’ve looked at some of your options and what makes them a good choice.

What Makes For A Good Investment Opportunity?

The distinction between a good investment opportunity and a bad one is all about the probability of success and the level of risk. There is a big distinction between probability vs. possibility.

Just because it’s possible that something may take place, does not make it likely to occur. Purchasing investments based on their value, possibly appreciation, is speculation, regardless of the potential return. Great investment ideas have a good probability of success.

Also, the amount of risk for an investment should be low. Periodic losses and volatility are part and parcel of investing. With a good investment, there has to be very little chance of losing the total amount you invest. Good investment ideas will maintain their value or increase in value for a long time. This will give you the opportunity to exit at a good price. Short-term investments have a high level of safety and liquidity.

What Is Speculative Spending?

In terms of speculative spending, the anticipated revenues or income significantly exceeds the anticipated payment obligations. In other words, what you expect to make from whatever you buy is far more than what you pay for it.

For example, think about a stock that you think is going to increase in value in the near future. What you expect to earn from the stock is far more than what you pay for it initially.

What Is A Good Investment For Your Small Business?

Most small businesses spend their initial profits reinvesting. Your SME should be no exception. The primary key to reinvesting is to have a solid strategy. Your reinvestment endeavors should align with your current strategic plan and not rely on potential future profits. The market can change quickly, and if your projected profit forecasts fall short, your reinvestment strategy will suffer too.

Invest in Your Team

Creating a better workforce will simplify your business, improve productivity, and create the type of company culture that will attract hard workers. Reinvesting your SME’s profits in human resources initiatives such as training and continuing education is never a bad idea.

As your small business grows, you can expand and include benefit packages and other discounts. Investing in your employees early on will assist you with reducing staff turnover. Remember that hiring a new employee comes with high costs, so it's always better and more cost-effective to invest in existing employees.

Invest In Yourself

Find ways you can enhance your knowledge or expertise. For instance, many SMEs are spearheaded by people who have a good eye for innovation but they don’t necessarily know the best way to manage people.

A lack of people or management skills is one of the most common criticisms founders face. Classes on management or basic business communication can be very valuable for people who don’t have a formal business background.

Hire Help

Entrepreneurs are guilty of trying to wear all the company hats. You need to recognize when you need help and when to ask for it. New hires can offer the technical skills and know-how to keep your operations going smoothly. This is one of the best investments that you can make in the long run.

Should A Small Business Invest In Stocks?

If investing in your business isn't an avenue you want to follow, you can consider investing in stocks. However, there are a number of factors to keep in mind with this type of investment, too.

The first point that a small business needs to consider when investing in stocks is their ‘why’. You need to ask yourself how this investment assists with meeting business objectives. Additionally, you should think about the business’s liquidity requirements, time horizon, and risk tolerance of market volatility. The responses to these questions can assist you in choosing the best investment for your situation.

Even with helpful tools like time tracking apps, invoice templates, and collaborative software, small business owners are stretched thin. A number of investments can not only be risky but distracting and time-consuming too. Plus, there’s no point in investing in something that you’re not familiar with.

If you don’t have the knowledge about investing in stocks, then you should be sure that you can spend the time understanding and taking charge of your own investment portfolio—not just relying solely on a financial advisor.

Decide On An Investment Strategy

You have to decide what a solid investment strategy looks like for your business. This is because investing in stocks covers a broad territory.

For instance, is there a single stock (or several) that you want to invest in? Or do you rather have a more varied portfolio with an ETF (exchange-traded fund) or mutual fund? Do you feel Bitcoin is the future and want to invest in cryptocurrency?

Even if you would like to stick with stocks, you’ll have to decide on a particular investment strategy. Obviously, you’ll have to choose what companies you want shares in; however, you’ll also have to choose what type of stock you want to invest in:

  • Preferred stock allows you to get a dividend from the company (a share of the profits) however, you don’t get any voting rights.
  • Common stock allocates you voting rights in the company, however, you’re far less likely to get any dividends.

In other words, you have a lot to figure out if you want to invest your money in stocks.

The responses to all these questions will depend on factors such as your risk tolerance, how much money you want to invest, and if you’re trying to get short-term returns (riskier) or long-term returns (safer).

For instance, if you’re trying for short-term returns, you may want to stick to preferred stocks in the hope that your company of choice does well. In that case, you may end up with a nice dividend and the ability to sell the stock for a lot more than you paid for it.

Final Words

Knowing the difference between a good investment and speculative spending is essential for any business owner—especially when they overlap.

Investing in your business is something you need a strategy for, whether you’re buying stocks or reinvesting in your employees or yourself. Once you have this in place, you have the best possible chance of making your money make more money.

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