How much should I pay myself? It is a question that many business owners ask themselves.
And deciding what that number should be is rather tricky.
Unfortunately, there’s no set formula for working out the exact number.
It depends on an interlinking range of factors – from the structure of your business through to the management of cash flow.
However, regardless of whether you are a start-up or a well-established organisation, you must pay yourself enough to get by. After all, the business can’t survive if you don’t!
If you are struggling to find the right number – or not sure where to even start – today’s blog will help set you on the right track.
How Much Should I Pay Myself?
Assess Reasonable Compensation
In some areas of the world, the government expects you to take a certain amount of money from your business. This varies depending on turnover, industry, and profit, but you can calculate it by researching what people in similar roles are paid.
This will at least give you a starting point to work from.
Cover Your Expenses
If you are a start-up, you may need to pull back and keep as much money in the business as possible. But that doesn’t mean you should live off two-minute noodles for the next few years!
Instead of taking a stab in the dark about what your salary could be, look at how much you need to cover your expenses as a starting point. Calculate all your living expenses for the year (make sure you remember to include less frequent expenses like insurance, vehicle maintenance, and doctor’s visits, etc.), and divide that figure by 12 to come up with your bare minimum monthly salary.
Once you have that figure, look at how practical it is in line with your current earnings and if you have that money available in the business. If not, consider what you can do to increase your revenue to accommodate for it.
Look At The Legal Requirements
There are different rules for different business types. Sole traders, for example, can pay themselves whatever they want. This is because they aren’t accountable to anyone else and are entirely responsible for the business.
However, once you put yourself onto payroll (as opposed to drawings) your business’ obligations to you are the same as if you are an employee. Check-in with your accountant or a trusted HR professional to ensure you are sticking to the rules for your particular situation.
Decide How To Pay Yourself
Again, depending on your business structure, industry, and country, there are various ways in which you can “pay” yourself from your business, including:
Your accountant can help you choose the best option for you and your business.
Focus On Profit, Not Revenue
It’s important to look at the right set of figures when deciding how much to pay yourself. Don’t get overexcited by the revenue flowing in. This money has to cover taxes, bills, and any other salaries too!
Instead, pay yourself out of the profits – the amount of money remaining after all your expenses are covered. That means you will still have the funds available to pay your bills.
Include Your Salary In The Planning Stages
Many businesses don’t make a profit in the first year – sometimes even in the first few years.
But that doesn’t mean you should skip being paid. Once you have decided how much to pay yourself, include the amount into the initial business plan to help with your budgeting. That way, it simply becomes part of the expenses you need to cover.
Keep it consistent
It’s hard to accurately record and forecast the financials if you are just dipping into the business funds whenever you need money to pay rent and buy food. Instead, decide on a regular amount to pay yourself.
This will help you, your bookkeeper, and accountant better forecast and budget.
Finding the right number can be a bit of a balancing act. You need to pay yourself enough to be comfortable while ensuring the business remains in positive cash flow for the foreseeable future.
If you would like help working out how to work a regular payment to yourself into your financials, then get in touch with the team here at Admin Army. Our financial experts can help you to understand what funds you have available and how you can utilise them. You can finally answer the question of ‘how much should I pay myself?’ Drop us a line today!