A question we often get as CFOs is how a business owner protects what they have already built.
The first standard I would apply is to learn how to manage your business in a way which promotes growth and manages cash flow by retaining reserves in the business to ride out downturns and build wealth. Lets asume you've already reached this point.
You're a Cash Flow King and want to know what do I do with excess cash in the business
When you start to build cash reserves in excess of the buiness and personal needs, you can choose to start investing. By leaving excess cash in the business, it can be put at risk if a legal claim or insolvency event occurs.
Doing nothing with cash means the purchasing value of cash falls with inflation. Differing investment types can provide greater retaurns with varying degrees of risk.
One of the core principle of reducing risk is diversification but is not suitable for everyone. Many investments require a minimum amount for them to function properly or provide a worth while return on investment. If you are seeking advice on the mix of investmensts, you should speak to a financial planner.
Diversification in investment classes
Speading your savings across more than one investment type reduces your risk. Imagine if you have everything invested in one type of asset and something happened causing the value of that asset to collapse. You would loose everything. If you have half of your savings invested somewhere else, you would only loose half.
This concept of diversification can be spead out between classes and within a classes of assests. Here are some examples
Diversification in ownership structures
Imagine if you had a successful company and excess cash, so you started investing the cash to improve the companies profits. This sounds fine for now until an event disrupts the market. The downturn in business conditions means all the investments owned by the business are also at risk.
These events happen more frequently than you might think. Large international events happen about every 10 years and other events can occur to affect your business more specifically like road works cutting off access to your business, government funding policies changing (NDIS, solar pannels, military...), new competitors and so on.
By separating the ownership of assets and investments from risky activities contained in other entities like the trading company (business), the separation of ownership can protect the investments from the business risk.
The exact strusctures chosen would depend on your personal circumstances and profesional advice should be sought.
In summary, by separating the ownership of assets away from entities that carry out risky operations and diversifying the investments, you can help protect your assets from market upsets and legal action.
This information is general in nature. Please seek advice in relation to your specific circumstances.
