When should you start paying yourself as a small business owner?
It’s a common question that business owners grapple with but figuring out how and when to start paying yourself is a challenge that many struggle to answer.
Setting out as a new business owner is a journey of discovery and, often, heartbreak.
Nobody gets into business for themselves to work pro bono, but unfortunately this seems to happen far too often, with business owners feeling obligated to pay down all costs and reinvest any extra into their business before drawing a meaningful wage for themselves.
This shouldn’t be the case.
For business owners, there should only be three answers to the question of when to begin paying yourself. They are:
- As soon as possible
- As soon as the business can afford it
- When your labour is part of the goods or service
In reality, there’s no one answer that works for every business.
The timing for paying yourself is different for every single business and business owner. Some businesses may be profitable early on, while others may take years to reach the point of breaking even, let alone profitability.
Not all business owners are actively working in the business. So when should they get paid?
Other business owners may work full time in the business and therefore require an income for living.
Some business owners have the expectation that they won’t get paid for the first 12 months and set aside personal funds to get them through. Others are planning to build up a business and sell it and receive their payment through the sale.
Every business owner will need to take their individual circumstance into account when considering when and how to pay themselves, and so it’s important to discuss this decision with a bookkeeper or accountant to make sure nothing is missed in the decision-making process.
There’s often more to it than just the ‘when’. You also need to consider: ‘Why should I pay myself?’, ‘How should I pay myself?’ and ‘What amount should I pay myself’.
Why should you pay yourself?
There are a number of pros and cons to take into account when working through the logic behind choosing to get paid as a business owner.
There may be many more on both counts, but here are the major considerations for and against so you can work out how best to define your personal situation.
Considerations for paying yourself:
- Paying yourself helps keep the cost of running your business accurate. Very often business owners don’t include their labour in costing and may under-price their products or services because they don’t incorporate it into the price.
- The value of the business can increase if it’s shown that the business owner has received a wage.
- You need to get your investment back at some stage and paying yourself is an effective means of doing that.
- Payment can act as a reward for your hard work. It can help to keep your spirits high. To work the hours many business owners do and not get a reward can become demoralising over time. Even if you start with a modest amount of money in the beginning and then increase it as the business grows, this can add to the sense of achievement and pride of owning and working in a business.
- The business gets used to paying for you, so if you want to leave the business, step back or get a replacement, it doesn’t end up becoming a new expense that has to be found.
Considerations against paying yourself:
- If you take money out of the business before it can afford it, you can put the business at risk. A business incurs a large percentage of costs at the startup phase and growth phase and needs to have healthy cash flow at this time. Drawing a wage is drawing from those vital funds.
- Paying yourself incurs an opportunity cost. Money that goes to the owner isn’t being spent on other things that may help grow the business, such as attracting more customers through marketing.
How should you pay yourself?
You should pay yourself in the way that works best for both you and the business.
And there are a variety of ways to pay yourself. You don’t always have to pay the same amount on a regular basis. For example, you could pay in chunks or on an ‘as necessary’ basis.
You could even consider seeing how the business is positioned at the end of the year and draw a lump sum according to the business’s capacity.
Most importantly, speak to your accountant or bookkeeper to discuss what options are best for you.
What amount should you pay yourself?
There are different ways to look at this question.
There are issues of worth, cash flow, replacement value and compensation for risk and investment – all of which can be factored in to what you get paid.
Ultimately, it’s your choice as to the rate, but you’ll want to be very careful that whatever you’re drawing doesn’t hamper the business’s growth or sustainability.
Some things to consider include:
- What your business can afford
- What is a realistic wage (not too low, not too high)
- What you need
- What you’d like
It is important to consider if the amount you are paying yourself would be enough to get a replacement for you? If not, you might like to increase it.
Are you earning the minimum wage or higher? Have you taken into consideration superannuation? If your wage is low, you might like to ask yourself why? Does it need to be that low?
One of the many reasons people start a business is to increase their earnings. It’s important to reward your efforts and the risks you’ve taken. If you don’t get around to paying yourself, those rewards may pass you by.
So, get some advice and work out a plan for when, what and how you’ll start paying yourself.
Whatever happens, don’t leave it too late.
Not sure who to discuss these issues with? MYOB works with the finest advisors, accountants and bookkeepers across Australia and New Zealand. Find an expert that can help your business on the road to success today.