Saving & Investing for Your Business, by Omagbitse Barrow

One of the important commitments that business owners need to make when it comes to managing their finances is around saving and investing. Saving refers to short term commitments (1-6 months) that you make, while investing is more focused on the long-term (more than one year). On a personal level, saving and investing helps you to put away some of your funds for the future to meet unplanned emergencies that may arise, as well as to position yourself to take advantage of opportunities for the future as well as earn additional income on your funds. The same applies to your business, you would commit to setting aside money from your income from time to time to save and invest for the future of your business. A good saving and investing culture allows you to grow your financial base into the future and your savings and investments can come in very handy in taking care of future emergencies and business opportunities. Without saving, you run the risk of being unable to meet future unexpected cash needs and also you may be unable to take advantage of growth and business opportunities in the future. In making a commitment to saving and investing for your business, you should take the following into consideration:

Setting Objectives:The first important step in making a commitment to save or invest is to identify what your objectives are, What will you like the additional funds you are putting away to achieve for you, Are you for example looking to just keep away some money for the “rainy day” or do you have some specific projects that you are targeting? Perhaps, you will build up savings to pay your rent, or to purchase some equipment required to expand your business. Sometimes, business owners also want to make such commitments to earn returns on idle funds that they may have and get some capital appreciation on the funds. You should have clear objectives for the purpose of your savings or investment as this will help you in making other decisions related to your commitment, like deciding the time horizon, and the type of investment instruments you will like to take advantage of.

Time Horizon:The time horizon for your commitment will be driven by your objective. If your objective is to save for rent or other short-term commitments, then your time horizon will be short to medium term. Where your objectives are for asset acquisition or just investment income and capital appreciation, then your time horizon may be more skewed towards the long-term. Just like your objective, the time horizon is critical in making other decisions regarding your commitment.

Risk Appetite:Your risk appetite in simple terms means your ability to accept the possibility that your capital investment may diminish in value at any time during your period of investment or at the point of your exit. Some investment instruments available do not protect the capital invested from loss in value, nor do they guarantee a specific return on investment; meaning that you may invest N100,000 and at the point of exit from the investment, its value may come down to N91,000 or less. While there are other investments that guarantee capital protection (i.e. you can never get less than N100,000 at exit), and may even further guarantee a specific return on investment. Your risk appetite is therefore driven by a number of factors, foremost amongst which is your investment objective and the time horizon for your investment. If your objectives and time horizon are short-term, your appetite for risk will be less. For example, if you are looking to save towards rent to be paid in four months, you have absolutely no business taking the risk that the N100, 000 will lose value. In the same vein, if you are looking to acquire land for expansion of your business in three years and will be investing N100,000 per month for the next three years, your appetite for risk may be greater to meet that longer-term investment objective/horizon, since it is possible that you could earn more from a riskier investment in the long-term. One of the fundamental theories of financial management holds that “the greater the risk, the greater the likelihood of higher returns”. It is important to draw caution here and state that it is only a “likelihood” and not a “certitude”. Therefore you should not necessarily take more risky investments just because they would always naturally translate to higher returns.

Timing:The timing of your commitments is also important. Some factors that business owners consider when timing their investment decisions include their initial investment objective, time horizon and risk appetite, the seasonality of their business, the need for cash for other operational needs, and also the current investment climate or outlook. The best advice we give to business owners is to make saving and investing a culture by making commitments on a periodic basis out of your existing cash flows. Sometimes people say it is better to wait till you have a huge amount of idle cash before you should invest, so that you can get better or more tangible returns on your investment. I have found as a business owner, that waiting for that “big day” may never come, and that by making smaller periodic commitments, you may be able to ride the ups and downs of the financial markets and have a more disciplined approach to investing, and at least have something set aside rather than absolutely nothing – while waiting for your big windfall.

Choosing Investments:Now that you have carefully considered your objectives, time horizon, risk appetite and timing, you should now be concerned with evaluating the various investment instruments you have and selecting the ones that fit your needs. There are generally three types of investment instruments available. First is the category of instruments that offer fixed income – they guarantee the safety of capital and offer return on investments in the form of interest. They are therefore very safe instruments and are usually very liquid – meaning that they can be easily converted to cash. Examples of such instruments include fixed deposits and money market placements with banks, treasury bills and bonds. Some fixed income investments may have a longer-term focus like Corporate Bonds and Government Bonds. Fixed Income instruments therefore represent the lowest investment risk. So for those with a really low risk appetite, or a very short-term investment horizon, fixed income instruments will be a good choice. Where you are looking to put away some money towards your rent or any other short term project, you can take advantage of fixed income instruments.

Another category is equity instruments or variable income instruments. They are the exact opposite of fixed income. They do not guarantee safety of capital (their values fluctuate from time to time) and there is no certain or fixed investment income. Examples of these are ordinary shares of companies, equity-based mutual funds, real estate, currencies, precious metals and even commodities that are traded on commodity exchanges. Typically these instruments are best suited to investors that have a higher risk appetite or who are willing to take a more long-term view to investing. When business owners invest on a periodic basis towards a long-term project, equity or variable income instruments are a good choice.

Finally, there are a number of hybrid investment instruments today that offer a combination of both principal guarantee and variable returns. Fund managers and investment specialists create mutual funds and other collective investment instruments that allow investors have a bit of both worlds subject to certain terms and conditions. The hybrid instruments satisfy the need for safety of capital, but also give you the opportunity to make variable returns. Business owners seeking to strike this balance may opt for such instruments.

Choosing Institutions: The final part of our discussion will be on choosing the institutions where you will make these investments. In Nigeria, investments are regulated by the Central Bank of Nigeria – overseeing the activities of banks and discount houses who offer savings accounts, fixed deposits, commercial papers, treasury bills and other short-term money market instruments. The market for long term equity instruments is regulated by the Securities & Exchange Commission and includes quoted shares, commodities, mutual funds, and others. In choosing a bank or fund manager, it is important to ensure that they are licensed and in good standing with the appropriate regulatory authorities. Some people choose to invest in all types of unregulated schemes promising amazing investment returns (‘wonder banks”) or sometimes engage in currency trading and speculation with unlicensed currency dealers – at very high risk. In addition to regulatory licensing, savvy investors pay attention to other factors such as the institution’s track record of safety and investment returns, the quality of people that work there, the strength of their own financial resources (capital), and their investment management strategy. When choosing investment institutions and instruments, you should be also mindful of another financial management principle – “when the returns seem too high or unrealistic, probe further, be cautious”.