As the old saying goes, ‘do not put all your eggs in one basket’, the same principle applies to small business owners that want to get the most out of their savings, while minimizing investment risks.
Elize Giese, Head of Investments at FNB Business says when investing business profits it is important for SMEs to have a diversified portfolio as a way of managing risks.
“Diversifying simply refers to limiting risks by spreading a company’s investments across different instruments and products in order to cater for short and long-term business needs,” adds Giese.
However, the extent to which a business diversifies depends on the nature of the business and its long-term investment and savings plan.
Giese says small business owners with cash on hand should opt for investments that are not only diverse, but offer liquidity in the event that instant access to cash is required for unexpected short-term business needs.
For example, there are various business investment products offered by banks that SMEs can chose from i.e. a Business Fixed Deposit with a short notice period and one with a longer investment horizon may be feasible. Typically, a 60 month Fixed Deposit account will yield a higher interest rate, making it ideal for long-term investments.
Alternatively, small business owners who want immediate access to their cash while still having the flexibility to add funds at any time can opt for a Money Market account.
For instance, a Money Market Transactor account offers SMEs transactional capability with the added benefit of earning interest on daily balances. While a Money Market Investor account is preferable for entrepreneurs that require limited transactional capabilities with easy access to their funds.
There are quite a number of products available in the market for SMEs that want to invest cash on hand. However, investing can often be confusing for entrepreneurs that are starting out, leading to costly mistakes.
“Therefore, before an investment decision can be taken, it is advisable for SMEs to seek the assistance of an expert financial advisor who can conduct a holistic assessment of the business and make recommendations,” advises Giese.
The paramount objective of diversification is attaining an investment and savings balance to help protect the business from any adversity that may arise while delivering growth. Even when an investment portfolio is diversified, it is essential to regularly review the investment strategy in line with business changes given the unpredictable economic environment.
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