Think about investing wider than just in your own business

Traditional savings mechanisms and retirement annuities are seldom at the top of a business owner’s list of priorities, probably because growing a business tends to absorb most of the available cash. In a sense, the business itself is a long-term investment and savings project. But Veroshen Naidoo, Regional Investment Manager at Business Partners Limited, urges business owners to look wider than just their business when they contemplate building their wealth for the long term.

On the back of South Africa’s national savings month, Veroshen provides the following savings principles:

1. Diversify

One of the basic principles of long-term investment is diversification – the spreading of savings and investments into various asset classes, industries and regions of the world. Not putting all of your eggs in one basket is the strongest argument for business owners to save over and above their investments in their business.

If the business fails or peters out, there is something for the business owner to fall back on. Or at the very least there might be some cash available if the business runs into trouble or needs resources quickly to take on a new opportunity.

2. Work according to a budget

Another top principle of savings and investments is to plan ahead and work according to a budget. It is always the first step towards financial health for any individual, and is even more important for business owners, who need to budget not only for their own personal needs, but for the business as well, and to carefully consider balancing these two spheres of their lives.

Clearly, business owners need a somewhat higher level of financial literacy to make sense of their books and their business cycle in order to plan ahead and often make difficult financial decisions. You don’t need to have a financial background or to study accounting, says Veroshen. There are lots of affordable basic financial literacy courses that business owners can do online at their own pace.

It will allow them to interact much more productively and insightfully with their accountants, and help to take their business plans to the next level. Working according to a thoughtful plan and budget is the best way to protect yourself against payday splurge – the temptation to spend too much when money comes in.

3. Pay yourself a market related salary and save

An important part of the financial viability of a business is its ability to pay a regular, market related salary to its owner-manager, who should be setting aside a portion of their income towards personal savings just like any other earner.

Setting up automatic transfers to savings and investment accounts on pay-day is a good way of guarding against splurging. It is almost always better to pay off your debts first before you start saving, simply because your debts carry more interest than you would be able to earn in an investment or savings account.

4. Review expenses and work with an investment advisor

Once you have cleared your debts, there is a wide range of investment products to choose from. There are a few obvious options that any investment advisor would point to, such as a tax-free savings account in which you can save up to R36 000 per year. Apart from any long-term savings, it is always a good idea to build up a contingency fund – accessible on short notice, to help tide over any emergencies that might befall you.

Similarly, any surplus money in the business is well spent on bringing down company debts, but the choices tend to be more complicated than for personal finance. Building up a working-capital fund to help the business tide over set-backs is crucial, and investing in stock or production capacity to help the business grow or ramp up for the busy season is also important.

Reviewing expenses is just as important as thinking carefully about what to do with surplus income. During the Covid-19 crisis, says Veroshen, many businesses were forced to take a very critical look at their expenses – some for the first time. The exercise saved thousands of rands, and many businesses emerged from the pandemic stronger because of that.