You started your own business to do something you love and make money. But how much should you pay yourself? Too little and you may struggle to survive. Too much and your business might be at risk. So how to strike the right balance?
If you are a new business owner, don’t make the common mistake of confusing revenue (sales) 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 first need to take into account what is payable to your suppliers, wages to your staff and take into account your overheads such as rent, cost of utilities, bank loan repayment, GST payable and other general expenses.
Once you have the numbers you can decide how much to pay yourself. There are no fixed rules about this, but there are some useful pointers.
INVEST MONEY FOR GROWTH
Any money you leave in the company can be used for investing and growing the company. For many businesses it makes sense to accumulate profit and invest the money into the business, instead of taking it out (and paying tax on it).
The more money you invest sensibly into your business, the more likely it is that your company will grow and they more you should be able to pay yourself down the track.
PAY YOURSELF ENOUGH TO LIVE ON, AND DO IT REGULARLY
Personal money issues are a big cause of stress and if you’re stressed then you won’t make good business decisions; take out what you need to avoid stress related problems for your business.
It’s best to pay yourself regularly, be it weekly, fortnightly or monthly. You should have a business plan right from the start that shows what payments you are making to yourself, built into the general expenses of running the business. A good business coach is best qualified to assist you with the business plan that will be the road map for your business.
BE TAX EFFICIENT: THREE POINTERS
Once decided how much to pay yourself you will need to work out the best way to withdraw the money from your business, while remaining as tax efficient as possible.
Pay yourself a straight salary: It’s easy, simply to manage and unlikely to raise any eyebrows. It is also potentially the least tax efficient way of paying yourself.
Salary with dividend payments: If your business is a Pty Ltd company you will own shares in the company, take a minimal salary and pay out the remainder in dividends.
Take a Salary plus annual bonus: This arrangement can be tax efficient in certain circumstances.
WHEN NOT TO PAY YOURSELF
If your business is going through a tough time financially, ensure your employees are paid before you pay yourself. Non-payment of wages to employees affects staff morale and consequently your business.
Also keep an eye on paying your creditors and financial institutions on time to keep your credit rating and business reputation.
ULTIMATELY THE AMOUNT YOUR PAY YOURSELF WILL DEPEND ON YOUR BUSINESS SUCCESS
The higher the sales of your business, the greater the potential; in a well-run business for you to be making greater profits and the ability to pay yourself a higher salary or dividends.
The information in this article is general in nature. Where appropriate seek professional help from an accountant, Business Coach or Business Adviser.