Financial investments are, essentially, additions to a business’s capital stock. These will range from machinery or equipment to a new manufacturing facility or additional production capacity to increase profit margins for particular products to yield higher dividend payouts. This type of investment is often used by businesses as a source of long-term growth capital. However, there is an important distinction between the two.
A company’s core business will typically generate enough cash to meet and exceed its financial investments targets over time. Therefore, it is not necessary to make outside financial investments in order to finance growth. Companies can instead choose to accumulate cash reserves, which are similar to savings accounts, in anticipation of future earnings that might not materialize as predicted. In fact, there are certain types of stocks that are almost risk free from maturity until such time as the company is able to generate enough profits to cover these investments. If a company has adequate funds to cover its expected costs and projected profits over the long term, then it does not need additional short-term debt facilities such as debt financing.
Many business people make the mistake of focusing on liquidating their current assets and run up huge debts in order to meet their short term financial investment goals. This is like stuffing your money in the stock market when you really want to keep it in the bank for the long term. Instead of liquidating all of your assets to meet short-term demands, focus on generating long-term income and distribute the profits among your various investors. To this end, it is smart to diversify your portfolio into both safe and riskier securities like stocks and bonds in order to protect your overall capital stock.