Your business is your baby. You cherish it and spend every waking minute worrying about it, even reinvesting any extra money you may have in it. While the desire to nurture your business’s growth might actually make you reluctant to consider paying yourself a salary–it would feel too much like you were taking candy from your ‘baby’—it is nevertheless an important step to take.
So when should I start?
Well, you started your small business just so that you could be your own boss and make money at the same time. Unless you’re personally very wealthy or have a little cushion money saved up to tide you over your business’s infancy, the answer to ‘when’ to start paying yourself is, ‘as soon as possible.’ In fact, your salary should be factored into your business plan and desired (in the near future) cash flow.
It is when you’re at the drawing board, and working out how to finance and launch your business, that you need to consider a couple of key factors vis-à-vis the best salary for a small business owner such as yourself.
What should I be mindful of?
Cushion money vs. a salary: As mentioned in the previous paragraph, you could set aside some cushion money for your personal living expenses, particularly when your company is still at the start-up stage. You would actually start drawing a salary once your company started turning over a profit. However, say you didn’t have any extra money stashed away; in that case, you would want to start paying yourself as soon as possible.
Revenue vs. profits: When drawing a salary, ensure it’s from your company’s profits. It’s pretty easy to confuse the two, the difference being your revenue is what goes towards meeting overheads and fixed costs, while profits are earnings that exceed this amount. Accounting software that can help you distinguish between the two categories is available and is a worthwhile investment. However, it isn’t always possible to wait long enough to make profits to begin drawing basic pay.
Fair and balanced pay: It may be a while before you can start paying yourself handsomely, and chances are you might choose never to do that. One of the basic thumb rules of self-pay is to pay yourself enough to live frugally but comfortably, whether you’re drawing your salary from your revenue streams or your profits.
When you draw large amounts of money away from your business for personal use, remember that the amount is liable to be taxed. It might actually make more sense to reinvest that money in your business. So how do you decide what this basic pay should be?
- Research the industry average; i.e. how much would someone who does the work that you do, make as a company employee?
- How much do your employees make? You don’t want a huge pay gap between yourself and the rest of the company, given the company’s stature as a small or medium business. It would inevitably mean that key overheads would suffer in some way.
You’re both boss and employee now, and that means you’ll be making a whole new set of decisions; how much to pay yourself is just one of them.