As a small business owner, paying yourself can be a tricky issue. You may be tempted to put all your profits back into the business to help it grow, but at the same time, you need to pay yourself enough to maintain your standard of living. Finding the right balance between reinvesting profits into the business and compensating yourself can be challenging, and it’s important to consider factors such as your personal financial needs, the financial health of your company, and your future plans for the business. Ultimately, paying yourself as a small business owner is a complex decision that requires careful consideration. Here are a few tips to keep in mind as you determine how to compensate yourself.
When to start paying yourself
Before you can begin paying yourself, the business has to be able to sustain that. Once your business starts to turn a profit, then you can begin to pay yourself. In the beginning, this will be small and hopefully will grow as your business grows.
How to pay yourself
There are two different ways you can choose to pay yourself and they are dependent on the nature of your business.
Salary: if you’ve registered your business as a company with limited liability, you have to go the salary route.
Owner’s draw: if it’s a sole proprietorship then you can just transfer money from the business accounts for personal use whenever you want and also to pay employees and contractors.
How much to pay yourself
When determining how much to pay yourself, here are some things to keep in mind.
The stage of your business: Depending on the stage of your business, you may need to adjust your salary expectations. In the early stages, you may need to reinvest more of your earnings into the business to help it grow. Later on, you may be able to pay yourself more.
Look at industry standards: Researching the salaries of other entrepreneurs in your industry can give you a better idea of what is considered a reasonable salary. This information can be found on job sites and industry reports. Look at what other entrepreneurs with similar experience and skills are earning and adjust accordingly.
Set performance goals: You could set performance goals for your business, and tie your salary to these goals. For example, you could set a revenue target, and only pay yourself a salary once that target has been met.
Percentage of revenue: You can choose to pay yourself a percentage of revenue especially if your business still has unequal incomes each month. This means your salary will vary depending on how much money you make.
Consider your personal financial needs: When setting your salary, it’s important to factor in your personal financial needs. You’ll want to take into account your monthly expenses, savings goals, and other financial obligations. This will help you determine the minimum amount you need to earn to maintain your standard of living or just afford to stay alive in the beginning.
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