Running a business can be tough.
Paired with bad bookkeeping, you may find yourself with unexpected expenditures and no salary.
It’s your business and your budget; there are some tough calls to make, but your paycheck is in your hands!
Knowing Your Business
There are some questions you need to know the answer to before you decide how much to pay yourself:
- Should you pay yourself enough to cover your expenses?
- Should you pay yourself what your business can afford?
- Should you pay yourself the salary you left behind to launch the business?
Of course, there is even more to factor in before you decide.
Misallocating your income can lead to a whole variety of problems down the line.
To know if you need to change prices, business and employee hours, and employee’s salaries, you will need a clear picture of exactly how much your business is making.
All businesses exist to generate profit.
By ignoring your paycheck, you could be potentially hindering your success.
What to Do
Your salary will be dependent on your living expenses, your financial situation, and the level to which you are comfortable drawing on personal savings.
The first thing you should do before considering your salary is to put together a list of all your personal expenses.
This is essential; if you fall into the red, it is likely your business will, too.
Once you have your personal expenses, divide them by 12 so that you’ll know your monthly costs – this way you’ll know how much salary you’ll need to receive.
When to Pay Yourself
If you’ve recently started your business, it may never feel like the right time to start paying yourself.
However, there are benefits to taking a salary early on, even if it is only a small amount.
It would be wise to seek professional guidance from a tax adviser or accountant, someone who can guide you through your personal situation.
Once you start paying yourself, a large tax break could be on the table, which is just one of the benefits for those who file as a sole proprietor of a business.
There are a whole variety of tax deductions you should be aware of.
Emotionally, receiving personal income can be a huge boost to both you and your business.
It is not uncommon for the lines of personal and professional finances to blur when your own a business, and if you are struggling in one area, the other may be affected.
How Much to Pay Yourself?
Obviously, this is a question only you can answer as the actual figure will vary dramatically from business to business.
There are some general principles to bear in mind when you begin to figure out the actual and appropriate amount to pay yourself.
- Taxes: The higher the salary you take, the more taxes you will pay. You should be aware of where you will fall in regards to tax brackets. It may be more beneficial to pay yourself slightly less and to put the difference back into your business.
- Budget: It’s a good rule to budget for the life you live – you should be realistic about this. It is not uncommon for small-business owners to struggle to live within their means. A solid rule to follow when taking a salary is to calculate the figure you need for the essentials – accommodation, food, and utilities. Of course, it is not unreasonable to plan for a little extra for small luxuries, though remember, they are not essential.
- Keep track of your daily expenses: Once you know your day-to-day costs, you should be able to start noticing any differences that may arise. Consider whether these are areas that need to be filled or areas where you could, in fact, be spending less.
How Much Are You Worth?
You should consider you actual worth when thinking about your salary.
It is possible to compute your market worth with two equally credible methods:
- Open market value: What would you be earning if you were paid by an employer? Take into consideration your experience and skills. The income you are sacrificing to begin your own business is a helpful guideline for when you set your salary.
- Comparable companies: Look to trade associations and other entrepreneurs and small business owners within your industry. Find out what other similarly sized businesses within the same region and industry pay themselves to get an idea of what you should be paying yourself.
Managing the Salary You Deserve
There is, of course, additional work when running a business, more than if you worked for someone else, and sometimes you may not be able to take the salary you think you deserve.
You should keep in mind the potential long-term advantages of working for yourself and owning a successful business.
A set, base salary with a bonus structure that kicks in when the business breaks even is often an advisable way to handle your compensation.
Bonus amounts range widely between businesses, but your aim should be to reach your market-worth salary as soon as possible.
However much you decide to pay yourself in the beginning stages of your business, you should plan to reassess the figure every six months or so.
Your business will evolve continually, and it will be important to adjust accordingly to the potential changes in cash-flow and capital, both the business and your own.
Remember Your Goals
Of course, an incentive for any business owner is to turn over profit.
But another goal you should reach for is consistency.
It is true that keeping consistent with your plans is not always possible; there will be times you will have to diverge from your plans to keep your business afloat.
Stay as consistent as you can; having a structured plan will help you identify the times you go off track and help you get back on them after whatever emergency you faced has been averted.