Small Business Accounting

Earning Money on Business Savings

A growing bank balance often takes entrepreneurs by surprise. Money in the bank can sit idle earning no interest. That's a business mistake you will want to be sure to avoid. We offer a few tips on how to maximize the earnings on your business savings.

What is your business doing with its profits?

With all of the planning, researching, and negotiating that entrepreneurs put into initially launching businesses, it's easy to understand why they often neglect to put serious thought into where they will keep the fruits of their efforts once their enterprises are up and running.

Surprisingly, as profits come in and their bank account balances grow, many entrepreneurs don't bother to earn a good return on that money in the bank.

Unfortunately, by overlooking this crucial issue, some entrepreneurs unwittingly scuttle their ventures' chances of staying in business for the long term. After all, when it comes to profitability, every penny counts - and that includes earning a return on business savings.

Managing idle funds for your business is different from saving individually. It's not nearly as simple as maintaining a savings account at a bank.

Unless your account's balance is under $100,000, the Federal Deposit Insurance Corporation won't guarantee the safety of your money should the bank fail, leaving you in a high-risk, low-reward situation, a bad scenario for any investor.

A better option for entrepreneurs is to consider putting money into stable, higher-yield investments that can offset inflation and earn a profit for you while simultaneously keeping your money relatively safe. In fact, that's a smart move for any entrepreneur, even if your bank balance is well below $100,000.

While the safest course of action is always to consult a certified financial advisor, business owners wishing to invest savings would do well to familiarize themselves with the rewards and risks of each type of security.

Entrepreneurs wishing to pursue this route have several suitable choices available:

  • U.S. Government Bonds. The main advantage of federal bonds is stability. Despite our national debt, the U.S. Government remains the safest underwriter of investments available. In addition, bonds have the added stability of being a fixed-income investment. Some, such as TIPS bonds, even calculate in inflation to guarantee a true profit. The downside of bonds is that they incur a penalty if sold before their maturity date; this may be a problem for capital ventures, where the availability of funds to deal with unexpected issues can mean the difference between success and debt or even bankruptcy.
  • Mutual Funds. While these are not quite as stable as bonds, they generally have a higher rate of return, making them a good choice for businesses willing to take on a bit of risk for higher profits. In addition, they are much more liquid investments, a must for businesses running on a shoestring budget.
  • Exchange Traded Funds. These generally offer the highest liquidity and growth but also feature the highest risk of any of these investments. Unlike mutual funds, ETFs can be trade like stocks, so you don't need to wait until they are revalued at the end of the day to make a transaction. Other benefits include ETFs low or nonexistent load and management fees. Business owners wishing to put their money into this option should eschew the more volatile sector-specific funds for a portfolio based around index funds tracking such stable benchmarks as the Dow Jones Industrial Average or the Standard and Poor's 500.
  • Convertible Bonds. These hybrid investments, which don't fit neatly into any other category, are basically bonds which give their holders the option of exchanging their share in a company's debt for a certain number of shares in that company. Convertibles provide businesses safety by offering them the best of both worlds. If the issuing company's stock has appreciated, the holder can obtain shares for below market price, much as if they had bought and exercised a long call option. However, should the issuer's stock founder, the holder can exchange the mature security as he or she would a normal bond. The main obstacle to small businesses who wish to invest in these securities is the expense. Because many issuers require a minimum investment in the five or six digit range, small businesses may be unable or unwilling to stake the necessary amount on a single company's performance.

Famous entrepreneur Ben Franklin once opined that "A penny saved, is a penny earned." In fact, if you choose the right investment vehicle for your business savings, a penny saved can turn into even more than a penny earned.

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