If your small business is taking off and you have spare cash to invest – there are few things to consider before you make a decision where to put the money. Experts warn that a sound investment strategy is an important business plan to have – and there is a list of what must be taken care of before you decide to invest in stocks.

First things first

Although a good idea, investing in the stock market should be fairly low on your list of priorities, and should not be something you jump into without careful planning. Small business owners should first have a sound investment plan. He further says it will be worth considering a possible investment in marketing first as it could have a high return on investment if done well but also looking at improving your team or offering better benefits and in yourself to improve your own knowledge and expertise.

Save first

In this vein, it is wise for small business owners to save first before investing. It is not a good strategy to sink all excess cash back into the business. Although your business needs cash flow and you understandably want to invest in your dream, it pays to be strategic at the same time. Keeping a rainy day fund that will buffer your business against emergencies is non-negotiable. You will probably be covered by your business insurance for disasters and catastrophes, but there’s nothing better than being able to quickly draw on your own cash if needed.

In business there are always ups and downs, so it is vital that a business are be able to weather the storms. He advises keeping 6 to 12 months of expenses in cash reserves at all times and setting up proper insurance to protect against disability.

Diversify – but not too early

One of the best ways to minimise risks while maximising returns on your investment is to diversify your portfolio. It is not wise to jump into the stock market too early. The growth of your business should get top priority. When you are ready though, it is a sound strategy to diversify your investments away from your own core industry.

A lot of small business owners have “familiarity bias” and reinvest in stocks that are related to their field. Although this is understandable, it also increases your business’ risk exposure. He advises small business owners to diversify by constructing a diversified portfolio with a better ability to weather industry-specific turmoil by investing in broad-based index funds or exchange-traded funds. It is critical to success for small business owners to diversify their investment portfolios. Holding onto excess cash in your business means that you are creating the same risk for your savings that exist for your business.

Do your due diligence

It is imperative for small business owners to conduct due diligence before investing in any stock options. Always be cautious and don’t jump in too quickly. Small business owners should study the financial information provided by companies before investing in stocks. However, the same diligence should be exercised when deciding to sell stocks. The market is by its nature unpredictable. It can suddenly drop and can just as suddenly head in the other direction. This means that you shouldn’t necessarily panic and withdraw from an investment just because the market suddenly drops.

While hedge funds are considered a higher risk investment and there are qualifying standards, they often are a valuable source of start-up money for small businesses, Investopedia points out. Seeing figures like legendary hedge fund owner, George Soros’ net worth might make it very tempting to invest in these funds but it might instead be worth gaining wealth for your business over a longer period and with more careful investments.

However, despite the risks, there are some advantages to investing in a hedge fund. Hedge funds tend to invest in a much larger variety of assets and can offer sustainable, higher rewards. If you have the cash to invest, but don’t have the time to look into alternative investments yourself, hedge funds may be for you. You should be aware, however, that most have a very high minimum investment requirement so they are not usually for the new investor.

Keep Personal Finances Stable

It is also critical that owners of small businesses make investing in retirement for themselves and their employees a priority. If you run as small business, you retirement is probably the last thing on your mind. However, as a business owner this is also your personal responsibility not just for yourself, but also for your employees.

Conclusion

It’s vital for small business owners to keep their personal finances stable. If this is not done properly, then it can lead to trouble in the business’ finances.