Before we get started, I need to slap a big, bold disclaimer all over this post. This in no way constitutes investment advice. I am not regulated to give investment advice, and you should absolutely consult a regulated financial advisor for any investment advice. Do not, under any circumstances, take my words as guidance on investments. Got that?
Now that’s out of the way, let me share with you how I think about where to invest my money.
People often get confused about the line between accountants and financial advisors. As a result, I am regularly asked when and where entrepreneurs should invest the profits from their businesses.
Should you put money into your pension? Start a property portfolio? Dabble in crypto and NFTs? Invest in the stock market through tracker funds vs buying individual shares? Who knows? I have an opinion on some of these, but it’s not for me to share. I am by no means an expert in any of these areas.
I can help you figure out how to structure and hold these investments in the most tax-efficient manner possible once you know where you want to invest, but that’s not what I want to discuss.
You must divest. Right?
Common, sensible knowledge tells you to divest your investments and hold a wide variety of types across different markets.
This is what I want to challenge (hence the need for the disclaimer).
I see far too many entrepreneurs extract profit from their businesses to make other investments too early. In my opinion, most would be better off reinvesting that money back into their business to keep generating bigger returns.
Why don’t entrepreneurs reinvest more into their own businesses?
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They don’t have a good enough grasp of their numbers and, therefore, don’t truly understand the return they are getting on that investment.
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They think it’s the sensible thing to do because they read it somewhere or someone they know who is wealthy told them they must.
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The grass is greener on the other side. They are lured by talk of unattainable, unrealistic returns from other investments. Reinvesting back into your own business is just not as sexy…
What is a good return?
The expected Return on Investment (ROI) you look for when making a decision will play a huge role in deciding where to put your money.
The average return on investing in the S&P 500 stock across 10 years is around 10% per year.
Investing in your own business can be slightly harder to pinpoint initially, but there are a few different ways you can approach this.
You might reinvest in a physical asset (equipment) or hire a new team member or some software to make you more efficient. All of these projects are usually quite easy to predict and measure your ROI.
But what about investing in your marketing? This, for me, is the area that is often neglected in small businesses, but those that master this experience impressive growth and ROI’s.
If you haven’t heard me talk about Unit Economics, now would be a good time to go and read my post:
Unit Economics 101: The Basics You Need to Know to Grow Your Business
If you understand your Client Acquisition Cost and the lifetime value of your clients, then you can make far better decisions about re-investing in the growth of your business. Let’s walk through a made-up example.
Our client acquisition cost (CAC) is £500
Our Lifetime Value (gross profit) is £10,000
So our LTV:CAC is 20:1
This means for every £1 we spend on marketing, we generate £20 in gross profit. This is probably an unfair direct comparison to other investments, as we are talking about gross profit, not net profit.
If this business has a 50% Gross Profit Margin and 25% Net Profit Margin then we just half the return to get a true, comparable ROI.
So in our business, for every £1 reinvested into our marketing, we generate £10 in Net profit. That is an ROI of 1,000%. Pretty impressive compared to 10%, right?
It gets better still. The 10% ROI from shares is over a year.
Our return is over our client's lifetime, in the case of 4 years. This works out to a Yearly ROI of 250%, still far greater than anything we are likely to achieve from external investments.
This might be an imaginary company, but these numbers are based on actuals I see regularly across my clients and are very much achievable.
By growing the profits in your business, not only are you increasing the money you can extract each year through dividends (or reinvest further!), but you are also increasing the valuation for a future sale.
What’s the risk?
The ROI you need to achieve on any investment will be influenced by the perceived risk and the likelihood of, firstly, getting your money back and, secondly, getting the ROI you expect.
The higher the risk, the higher the expected ROI you seek to compensate.
You have far greater control over the return you get from your business than any other form of investment. Yes, external conditions will impact your business, but how much control do you have over the stock price of a fund or the property value in your market?
Call me a control freak, but I will take my chances with my own business all day long!
Where does it stop?
How far you take this investment strategy depends on you and your business.
What are your personal goals, and what do you ultimately want from your business?
You may not want a bigger business. You might be at an optimum level for you already and getting bigger might increase your stress levels and remove some of your time freedom.
So this strategy isn’t universal. You could be optimising for other factors than the money ROI.
There are other factors which might mean now is not the right time to re-invest in your marketing. If you have other bottlenecks in the business then increasing spend on marketing is a waste of time. The most common bottlenecks I see are people, and hiring the right people quickly enough.
What are the alternatives?
If now isn’t the right time to re-invest in your business but you are still generating excess profits then you have four other options, loosely in priority order for me:
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Save it - You should always keep a certain cash buffer anyway but saving beyond this for a short time can be sensible to then re-invest when the time is right. Be wary about keeping too much for too long though. It is a waste.
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Invest in your self - Investing in your own self development can unlock another level of earning potential for you and your business. This can yield one of the highest ROI’s you will find.
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External investments - Make some of the investments that you were considering before reading this post. The pensions, property, stock market. Whatever works for you.
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Spend it - Take it out of the business and spend it on yourself and your family - enjoy the fruits of your labour! Just don’t do this too early on in your journey otherwise you will heavily restrict your future earning potential (Read up about compounding if you aren’t familiar with its effects).
As I am sharing what works for me, it wouldn’t be very transparent and fair if I didn’t disclose the fact that I do have some investments outside of my businesses.
These investments came at a time when our marketing efforts weren’t producing a great ROI so I needed to look elsewhere. They are also in very efficient tax saving wrappers which can go a long way to improving your overall ROI.
I have also invested heavily in my own skill set and self development throughout the last 10 years.
Investment is a very personal thing, and there are plenty of other psychological factors that you need to consider. I want to challenge you to at least consider reinvesting in your business for a longer period of time than you would have otherwise thought sensible.
About the author
Luke Desmond
Fractional CFO for Tech, eCommerce & SaaS. CEO @Crisp_Acc provides virtual finance functions. Co-Founder @getvaulta SaaS Startup for accountants.