You started your own small business to do something you love and make money. But while you have the freedom of setting your own salary, how do you strike the right balance between earning a living and what your business can afford?
Pay yourself from profits
Don’t make the common mistake of confusing revenue with profit. When you see money coming into your business, don’t assume you can pay yourself a big slice of that.
Before you take your cut, you need to first take into account things like taxes, payroll, fixed costs and overheads. It’s important to keep track of all expenses, calculate profit rather than revenue or turnover and identify areas you can make tax deductions. Then you can quickly see whether your company is making enough money to afford to pay you.
There are no fixed rules about how much you can pay yourself, but here are some useful pointers.
Invest money for growth
If you want your business is going to grow in the future, it makes sense to use some of your profits to help that growth. The more money you invest sensibly into your business, the more likely it is that your company will grow. And that means you should be able to pay yourself more at a later date.
There's no point in being a complete miser with your company's money if it causes you personal financial problems which are a big cause of stress. It makes good business sense to pay yourself enough money to live comfortably without worrying.
Pay yourself regularly
Don't just dip into your business funds as and when you need to. Set up payments for you and your employees (it may be weekly or monthly) in your accounting software, and stick to them.
Build that into your business plan right from the start, perhaps with a rising salary as your business grows. That way you'll get used to the amount of money you receive and won't have to worry about taking out occasional large lump sums.
This will look better to your employees. Regular small payments will also look more acceptable to the government, too. If you take out big sums of money at irregular times, it may raise eyebrows at the tax office or lead to an audit of your company.
If your business is going through a tough time financially, it’s usually not a good idea to take any money out of your business for personal use. You should avoid taking any money if your employees haven't been paid. It looks bad, and would seriously affect their morale if you did.
Pay yourself fairly
Ultimately the amount you pay yourself will depend on the success of your business. The more money your business brings in, the higher the salary you could reasonably be expected to draw from it.
It makes sense not to get carried away and pay yourself too much, for reasons described. But if your company is profitable, there's no reason why you shouldn't reward yourself for that success.
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