How should you pay yourself as a business owner?
It can be very tempting to use the business savings account to cover all your personal expenses!
Quickly paying off that electricity bill, buying yourself some new clothes, or taking the family out to dinner all on the company card might sound like a good idea at the time…
But consistently doing this will make it difficult for budgeting and managing your cashflow.
It can also create unwanted complications at tax time!
INSTEAD you should look to pay yourself a fixed amount that ties in with your business budget.
Paying yourself a SALARY will help you to put aside the right amount of income tax throughout the year which is beneficial for your end of year tax planning.
It can also make sure you aren’t forgetting to top up the super piggy bank each year through compulsory super guarantee.
The FIRST step for setting yourself a fixed wage should always be to review your business cashflow.
You can’t pay yourself if there isn’t enough money in the bank!
So be sure to check your business has sufficient cash reserves to support a wage.
It’s important here to review how consistent the cash levels are and whether there are any fluctuations.
This will give you a good idea of what wage you can afford to pay yourself.
The SECOND step would be to review your Profit & Loss statement to see how profitable your business is.
Look at your total monthly income, your total direct costs and total overhead costs.
+ Then add on the additional overhead of your own wage.
Will you still be profitable if you pay yourself this much?
Don’t overcompensate yourself to the point where your business is no longer profiting.
This will put a large strain on cashflow and your business will suffer as a result.
You would have to have some pretty big cash reserves to consistently run your business at a loss.
You should aim for a modest salary that leaves enough cash in the business to cover your outflows and to invest in its growth as well.
TIP: Even if you have to pay yourself a little less then you would like in the short term. As your business grows you can always increase your salary. Taking a modest amount to begin with will keep your business running smoothly
This strategy will pay off for you in the long run!
If you would like to learn more about this or would like help applying this to your business then get in touch with us today!