Remember when you were still working for “the man”? Your wages would land in your bank account every payday, and then you’d do your best not to spend it all before the next one was due.
And if you did run out of money, the only way to get more was to ask friends or family members.
But that’s all changed now that you’re a business owner. You don’t need a regular wage anymore, because you can just use the money sitting in your business’ bank account. After all, it’s your business. And that means the money’s yours, right?
Actually, the money belongs to the business, not you. In fact, chances are it’s already earmarked for wages, rent or equipment. And that’s just one of seven reasons why you should stop ‘raiding the till’ and pay yourself a regular wage instead.
7 reasons you should stop treating your business like an automatic teller machine:
1. A lot of the money in the business’ bank account is already spoken for.
Often the money in your business’ bank account is needed to cover things such as:
- Paying contractors and suppliers
- Stock purchases
- Rent and utilities
- Future tax payments
And it needs to stay there so you can pay the bills when they’re due. Because If you can’t, your business is as risk of becoming insolvent—no matter how profitable it is.
A reliable cash flow is a vital part of any business. And it’s far easier to manage cash flow when you have predictable expenses you can plan around—including your salary.
2. You need it to grow your business.
To grow your business you may need to move to a larger premises, or invest in new staff or technology. And to do that, you’ll need a lot of cash.
Whatever your plans are to grow your business, you’ll need enough money to fund them. And that’s on top of the money you already need to keep the business running at its current level.
To build up your cash reserves you need to know exactly how much cash is flowing in and out of the business. But if you keep raiding the till whenever you’re short of cash you’ll never really know what cash you have in reserve, and whether you can afford to go ahead with your plans.
4. You’ll avoid the dreaded ‘lifestyle creep’.
We often build our lifestyles around the money we have. The more there is, the more extravagant our lifestyles become.
If your business has an amazingly profitable week, and its bank balance goes up accordingly, you might think of it as a chance to indulge on dinner at a fancy restaurant, a weekend away, or some new gadget you’ve always wanted. And that’s fine—as long as you treat it as a bonus in accordance with your business’ planned and documented salary and remuneration packages.
But if you keep doing it every time there’s a bit of extra money coming in, you’ll start thinking of it as part of your standard income. It will effectively become your new baseline, and you’ll create a lifestyle that demands that kind of salary every week, whether or not the business has had a similarly profitable week.
And that’s not good for the health of your business.
By living off a regular salary (and nothing more) instead, you’ll learn to live happily within your means—one of the keys to building wealth.
5. You’ll appear as a harmless blip on the taxman’s radar.
The tax office is used to people getting a regular wage. It’s how most people get paid. And if they see you as just another person getting paid a regular wage, they probably won’t give you a second glance.
But if you start withdrawing large amounts from your business’ bank account whenever you feel like it, it’s bound to get their attention.
And that’s never a good thing.
6. You could be creating an unnecessary tax liability for your business.
As an employee, your boss has to set aside a portion of your pay as tax, which they periodically pay to the government on your behalf.
But despite what you might think, the money you withdraw from your business’ bank account isn’t tax-free. Depending on your business structure, it needs to be properly accounted for as:
- drawings or a loan from the business
- dividends (a portion of your profit)
By raiding the till whenever you’re short of cash, you could be creating a potential debt that will need to be paid at some point. And that debt could lead to severe cash flow problems down the track, especially when you try to sell the business.
You’re much better off just paying yourself a wage so you can account for the money, and just pay your taxes when they’re due.
7. You’ll improve your chances of getting a loan.
When you apply for a loan, one of the first things the banks will check is whether you’ll be able to make the monthly loan payments. And to prove that, you’ll need to show you not only earn enough money to make those payments, but also earn it consistently.
That means you’ll need to provide pay slips and/or bank statements showing regular amounts going into your bank account. And you can hardly do that if you’re grabbing whatever’s in the till whenever you need it.
So the sooner you start paying yourself a regular wage, the better.
Running a successful business is a great way to create and accumulate wealth. But don’t make life hard for yourself by showing the banks sporadic and inconsistent payments to your bank account.
How much should you pay yourself?
It’s all well and good to say you should pay yourself a regular salary. How much should you actually pay yourself?
It needs to be enough to cover your basic living and lifestyle requirements. After all, it’s hard to make sound business decisions when you’re stressing about how you’ll pay the power bill.
But you also need to make sure your business has enough cash to operate. Even if there’s plenty of cash in reserve, there may be more tax-effective ways to receive income from your business, such as dividends.
Important note: There’s no specific answer to this question. The situation will be different for every business and its owner, and so it’s vital that you get personalised advice from professionals like us. All we’re doing with this blog post is opening your eyes to the benefits of paying yourself a consistent salary.
That being said, before you make an appointment to speak to someone, you should consider things such as:
- What your business’ cash flow can comfortably pay you on a regular basis
- What you feel you’re worth (e.g. if you were employed by someone else)
- What will let you achieve your personal and family wealth creation goals, such as paying off your mortgage or building your investment portfolio
- Tax considerations so you pay yourself the optimum amount to meet your needs without needlessly paying too much personal income tax
- The business’ projected profitability for the financial year.
If that all seems overwhelming, don’t worry. Get in touch and we’ll look at you and your business’ current position and help you work it all out. We’ll also set up payroll systems that automatically create and distribute the tax-related paperwork needed for each pay period.
It’s great being your own boss. And with a regular salary, it’s even better.