I made a shocking discovery recently. I realised that so many small business owners do not pay themselves a salary, drawing, allowance, stipend or whatever you want to call it from their business. Despite the number of hours they put into the business, burning the midnight oil and willing for things to work out, they are the last people that get any benefit from what they do.
I understand that as a start-up, money might be tight in the initial stage and drawing a salary almost impossible. However, this should be factored into your income and expenses from the onset especially if you are getting a grant, loan or investment to start your business. One of the leading causes of frustration in business is when there is no monetary reward over an extended period for the effort you put into the business.
What Can the Business Afford?
The best way to avoid the feeling of frustration and excess labour is to consider and factor in how much the company can afford to pay you. You do not have to start with a lofty salary of £500 a day if your business cannot afford it, but neither should you start with a salary too low. I realise from my experience that if you set a salary too low, your business will just about accommodate the small wage – call it the law of the universe or law of attraction. If you expand your financial vision, your business will catch up.
What Are You Worth?
You should also be clear about your values and self-worth. What is your talent, skills and knowledge worth? Is your business offering you what your time and effort are worth? Even though it might not look like it from the onset, but does it have the capacity to do so soon?
Balance Your Expectations
Do you earn a comfortable salary while working as an employee? If starting a business will create a huge dip in salary and lifestyle, you could consider a gradual entry into the business world. Start part time and allow your dream to grow before you make a full transition. Balance your expectations – your business might not break even in the first or second year.
Know How Much You Need to Live By
If you are just starting out, it is wise to determine how much you need to live on and factor that into your profit and loss account, it will help with your sales forecast too. It helps you know how much you have to bring in every month to pay yourself and fund the business expenses. It can also serve as a great incentive to bring in more sales.
Set a salary for yourself and place a demand on your business revenue. Then watch how you begin to accommodate a bigger vision and sales forecast.
How Do You Pay Yourself?
The first step is to separate your personal and business expenses – if you do not already do that now. Make a clear distinction by using separate accounts for both. If you are one of those individuals who blur the lines between the business income and your personal income, I will advise you to stop today. You must decide to open either a business bank account or a separate personal account for your business. It is one of the ways you can accurately determine if your business is profitable or not. Remember all the money coming into your business should not end up in your pocket.
Keep clear records of money that go in and out of your business. The easiest way to do this is to avoid too many cash transactions and if you must receive them bank the money as soon as possible. Do not spend money that has not been through your bank account.
You can choose a nominal fee to get you started and adapt to the process. I advised one of my clients after looking at her business income closely to use a 70/30 or 60/40 rule. The former for expenses and revenue to retain in the business and the latter should be her own salary. Be sure to keep records of every penny you draw from your business and the one you loan your business too.
Consult an accountant who will be able to help you determine the most tax-effective way to pay yourself while saving on additional expenses. It may be worth drawing an average salary for a while just to reduce your tax liability until you can offset more expenses off your revenue. Your accountant will be able to determine if you should draw a salary, dividend or allowance from your business and the best way to go about it.
Be consistent. If you decide to pay yourself £2,000 a month from your business, endeavour to be consistent by pushing yourself to draw in the revenue to make it happen. Remember revenue is not profit, you must take into account all the other expenses in your business in addition to your salary.
Once you start taking these steps in your business, you will be amazed at how your business begins to accommodate your additional expenses and induce revenue growth.
Do you need help to figure out your business income and expenditure? There is nothing a free Exploration Session can’t cure. Book yours with us today by emailing ask@businessfirststeps.co.uk with your request.
I am cheering you on to incredible success.
Temi Koleowo
The Idea Catalyst.
