How Much Should You Invest in Your Business?

As 2011 winds down, many business owners have begun to plan for 2012. Although an unstable economy featuring high unemployment rates has made a mockery of 2011 planning documents, it’s still vital to set goals for 2012 and to map out a strategy that provides the best chance for success.

One of my clients who has started the 2012 planning process recently asked me perhaps the most important question facing business owners each year: “With the economy’s ups and downs, how much should I invest in my business in 2012?” And, “What are the factors I need to consider when figuring this out?”

Great questions. Because the answer for every business owner is going to be different, I’ll share a view of the approach that business owners should take in order to arrive at this decision.

Business owners need to look at their business as an investment much in the same way they look at their personal investments in the stock market. Basically, it's an analysis of risk vs. rate of return. While on the subject, business owners should look at how much money they are investing into various securities, bonds and other financial vehicles.  Business owners should view the business as a personal investment that provides the best rate of return, and so a lion’s share of investment dollars should be directed toward the business. If your view is the return on your investment in the business will be low, consider closing shop and working for someone else. If it’s above what you can make in the stock market, investing in the business is a no brainer.

It’s beneficial for business owners that year-end business planning coincides with year-end tax planning. It’s a good time for owners to look at their take-home pay. If they are serious about investing in the business, I recommend that they limit their salaries to the bare minimum so as to maximize the money that can be plowed back into the business.

Once committed to investing in the business, the question becomes how much is needed, and what is accessible? Determine the options for finding the funds to invest, and the related costs, and determine which one makes the most financial sense. 

Like a personal investor who diversifies his portfolio with high, low, and medium risk stocks and bonds, business owners should attempt to diversify their business investments each year. Sinking all available capital into one product, service, or division sets up the business owner for tremendous success, or failure. Spreading out the investment over several products or divisions increases the chances that one group’s growth will support the other divisions during downturns.

If all goes well, that business owner can supplement his or her bare minimum salary with a nice bonus at the end of the year, based on profits and available cash which were fueled by those business investments.