Introduction
“My advisor keeps telling me to diversify. Why would I move money from a business earning 25% into something earning 8% – 10%?”
Honestly, that’s a fair question.
Many successful business owners built their wealth by doing exactly what conventional investment theory says not to do. They concentrated their time, energy, and capital into one opportunity and kept reinvesting when it worked.
That’s not a mistake. In many cases, that’s exactly how wealth gets created.
The problem is that eventually the question changes. Early on, the goal is building wealth. Later, the goal becomes protecting some of what you’ve built without killing the engine that created it. And that’s where many business owners get stuck.
Why Diversification Advice Often Falls Flat
Most financial advice is designed for investors. Business owners are different.
A business owner doesn’t view their company the same way an investor views a mutual fund or publicly traded stock. They understand the customers, the employees, the competition, and the opportunities. They have control over the outcome in a way they never will with a stock portfolio.
That is why many business owners struggle with diversification advice.
From their perspective:
- The business has generated far higher returns than the stock market.
- Every dollar reinvested has historically created more value.
- Their biggest financial successes came from taking concentrated risks.
- Pulling money out can feel like slowing down momentum.
Many of the wealthiest people in the world became wealthy through concentration, not diversification.
The challenge is that concentration is often how wealth is built, while diversification is often how wealth is preserved.
The Real Question Most Business Owners Are Asking
The real question is not whether diversification is good.
Everyone already knows diversification is sensible.
The real question is:
“What is the best use of the next dollar?”
That dollar can generally go into one of three places:
Operating Capital
Money needed to run the business.
This includes payroll, inventory, taxes, rent, working capital, and short-term reserves.
Growth Capital
Money that can be deployed into projects expected to generate attractive returns.
Examples might include:
- Hiring key employees
- Expanding locations
- Purchasing equipment
- Acquiring competitors
- Investing in marketing
Excess Capital
I frequently see service business owners around Carmel and Indianapolis accumulate significant cash balances simply because they are busy running successful businesses.
One day they look up and realize there’s $300,000 sitting in the business checking account, and they genuinely aren’t sure what they’re legally allowed to do with it, much less what they should do with it.
This is where a lot of business owners get stuck. The bills are paid, payroll is covered, and the business has more cash than it needs for day-to-day operations. The problem is that nobody ever taught them how to think about the next dollar.
How Much Cash Should a Business Keep on Hand?
There isn’t a universal answer.
A manufacturing company in Indiana may require significantly larger reserves than a professional services firm with very little overhead.
A physician who owns a medical practice has different cash flow risks than a construction company owner.
Generally speaking, business owners should maintain enough liquidity to:
- Handle normal operating fluctuations
- Cover unexpected expenses
- Navigate economic downturns
- Sleep well at night
Beyond that, the conversation becomes less about cash management and more about capital allocation.
Should Business Owners Reinvest Everything?
This is where many owners unknowingly run into diminishing returns.
If reinvesting $100,000 generated a great return, it is tempting to assume reinvesting $500,000 or $1 million will produce the same outcome.
Sometimes it will. Often it won’t.
Most businesses eventually reach a point where:
- Growth opportunities become less obvious
- Competition increases
- Margins compress
- Returns on new investments begin to decline
That doesn’t mean reinvesting is wrong. It simply means that every dollar should compete for capital.
The question becomes:
Is this next dollar likely to earn a better return inside the business or outside of it?
That’s a very different question than simply assuming all money belongs in the company.
What Happens If Your Business Is Most of Your Net Worth?
This is the question I encourage every business owner to consider.
If your business became worthless tomorrow, what would be left?
It’s uncomfortable to think about.
But every business owner has experienced events they couldn’t control:
- Regulatory changes
- Economic recessions
- Lawsuits
- Industry disruption
- Key employee departures
- Major client losses
Many successful business owners have built extraordinary businesses. The challenge is that their retirement plan, estate plan, and family security often become tied to the same asset. That’s a tremendous opportunity. It’s also a tremendous concentration of risk.
Taking Chips Off the Table Doesn’t Mean Stopping the Game
One of the biggest misconceptions I see is the belief that diversification means giving up on growth.
A lot of owners hear this conversation and assume I’m telling them to stop betting on themselves.
I’m not.
In many cases, the business is still the best investment available. If you’re earning exceptional returns on capital and have opportunities to continue growing, it may make perfect sense to keep reinvesting.
The question is whether every dollar belongs there.
One of the mistakes I see is business owners treating this as an either-or decision. Either the money stays in the business or it gets invested elsewhere. Real life is usually more nuanced than that.
Let’s say a business owner implements a 401(k) plan, adds a profit-sharing component, and adopts a cash balance plan. If those strategies reduce taxes by $100,000 or $200,000 per year, that creates opportunities that didn’t previously exist.
Some of that money might end up in retirement accounts. Some might be invested in a brokerage account. Some might be used to hire another employee, open a second location, or invest in new equipment.
Those aren’t competing decisions. They can all happen simultaneously. And to me, the conversation isn’t really about diversification; it’s about making sure every dollar has a job.
No doubt, some dollars need to keep the business running while some dollars need to help it grow.
But it’s important not to lose sight of the fact that some dollars need to support your family’s future regardless of what happens to the business.
Wealth Creation and Wealth Preservation Require Different Skills
Most business owners spend decades learning how to create wealth. Far fewer spend time learning how to preserve it. The mindset that helps build a successful company is often aggressive, optimistic, and opportunity-focused.
Those traits are valuable, and they are often exactly what created the success. But eventually every owner reaches a point where protecting part of what they’ve built becomes just as important as creating more. The challenge is recognizing when you’ve reached that point.
Final Thoughts
There is no magic percentage that every business owner should keep outside their company.
The right answer depends on:
- Age
- Industry
- Growth opportunities
- Existing wealth
- Family circumstances
- Personal risk tolerance
But there is one question every successful business owner should ask from time to time:
If everything went wrong tomorrow, have I already taken enough chips off the table that my family will be okay?
If the answer is no, the next dollar probably shouldn’t automatically go back into the business.
