In the current economic climate, the notion of having disposable income seems a little fanciful. After all, inflation is continuing to grow at a disproportionate rate to earnings, creating an inflated cost of living that prevents people from saving.
This is also impacting on small businesses, which will see their profitability decline as disposable income levels fall and customers spend less on non-essential purchases.
However, for entrepreneurs that operate in growth markets and have been able to generate profits in recent times, the challenge has become understanding how to use this capital effectively going forward.
Here are some things to keep in mind.
Investing in commercial or individual growth
For entrepreneurs that record a healthy net profit, the temptation is to reinvest at least some of this capital into their venture.
The ultimate goal here is to drive sustained and greater profitability in the future, whether the money is used to reduce operational costs, underpin strategic growth or repay existing debt within the company.
The key is to consider the real-time and future needs of your business, in order to determine whether or not reinvestment is the best use of company profits. Most importantly, you should not put capital back into the business simply for the sake of doing so, particularly if you have more pressing concerns outside of the venture.
For entrepreneurs whose ventures have an established business model or minimal debt, reinvestment may not be necessary. Similarly, entrepreneurs that want to consolidate in a challenging economic climate will be loath to reinvest, so it’s important to seek out alternative uses for your cash in this instance.
One option is to invest in your own financial growth, as you use your company’s hard-earned profits to create a fiscal nest-egg for the future. On a fundamental level, this will help to build personal wealth in a strained economic climate, while negating the impact of potential pension shortfalls and rising inflation in the future.
Beyond this, such a strategy also creates an independent source of wealth that is entirely separate to your business. This can therefore be retained in instances where your business encounters financial issues or reinvested into the company sometime in the future.
The last word
If you do decide to invest in your own financial growth, the key is to identify a pension vehicle that has the potential to deliver sustainable returns.
One possible option is to open a flexible SIPP (self-invested personal pension) through a service provider such as Bestinvest, as this can provide access to a diverse investment portfolio that taps into growth markets across the globe.
If you’re fortunate enough to own a profitable business, it’s imperative that you use your excess capital to good effect. This requires informed decision-making and a willingness to measure your own objectives against the demands of the wider economic climate.