So, the past year ended financially happily for your firm. Your profit after tax was a significant sum and you’re wondering what to do with it. Even if this scenario isn’t your reality, perhaps, the profit isn’t significant, or there’s no profit at all, imagine a time when you’ll have overflowing profit. Wouldn’t you like to learn a sustainable way of generating wealth from your profit? I bet you do!
Remember, divisible profits should be taken out before attempting the suggestions below. Divisible profits are the profits that the law allows the company to distribute to the shareholders by way of dividends.
Once the divisible profits are taken out, what is left is referred to as Retained Profit. This is the profit you reinvest into your business to enhance profitability, productivity, and efficiency. This article will focus solely on money-yielding ventures, however, it is generally agreed that retained profit should be used to improve all business aspects such as marketing, employee growth, technology, etc.
Here are five (5) money yielding opportunities you can invest your profits into:
i. Invest in Cash Cows: A cash cow is a venture (business, business unit, or product/service) that generates a steady return of profits that far exceeds the outlay of cash required to acquire or start it. Identify the cash cow of your firm and invest in it to enjoy a steady inflow of profits over a long period of time. Companies also have “Stars” but unlike cash cows, stars require large capital investment in order to generate significant cash from the high market share they hold in high-growth markets.
ii. External Acquisitions: This refers to the purchase of other companies using two major channels – mergers and acquisitions, and strategic alliances. While this may seem like an option for the major players in the industry, an emerging player may consider this as a long-term plan. Benefits include access to new markets, increased market power, access to new technology/brands, diversification of products or services, and increased efficiency of business operations.
iii. Capital Improvements: Technically, this is a term that is used to describe a permanent structural alteration or repair to a property that improves it substantially, thereby increasing its overall value. This option is beneficial where the current asset will improve business processes in a seamless and tech-enabled manner, reduce future operating expenses, and increase its life cycle. There is also the possibility of claiming capital allowances on such improvements which reduces your tax.
iv. Contingency Fund: The best time to save funds that will be used to resolve unforeseen scenarios or future emergencies is when profit is available. Such funds are held as liquid assets or cash which are easily converted during troubled times.
v. Investment Portfolios: Limited liability companies can buy the stocks, shares, etc. of traded companies and earn dividends from their declared profits, and/or generate returns on other types of investments such as bonds, mutual funds, etc. As a small business, you will likely purchase a portfolio from larger and more successful firms, putting your money to good use until you wish to liquidate the portfolio.
Which of these money yielding opportunities are you willing to try this year? Let us know in the comments.