Why business owners should pay themselves a salary
Posted by Northadvisory on April 7, 2021
Most business owners are focused on one thing… business growth. Investing time and energy into creating a truly successful venture can be all-consuming and often they spend countless hours doing lots of work, but don’t receive a proper pay packet.
Understandably, they could be aiming to maximise reinvestment into the business or maybe they want it to be in a stronger financial position before they draw a formal wage. But we believe it’s important for business owners to pay themselves properly as soon as it is financially viable.
By paying yourself a salary, you set up good accounting practices within the business. Rather than just casually taking cash out of the business bank account, utilising a payroll system ensures you have appropriate visibility of where the dollars go and you make sure that you meet your compliance requirements.
Value your time and skill
The first few years of a new business can be challenging and there might not be a lot of profit on the books, but that doesn’t mean you shouldn’t pay yourself.
Your time and the skills you are utilising in the business are valuable and they deserve to be financially recognised.
Undervaluing your work can eventually impact your productivity.
No matter how passionate you are about your business, if you aren’t seeing the financial benefits of being your own boss, your motivation can diminish and potentially lead to you walking away from your endeavours.
How much should you pay?
When it comes to paying yourself, it’s important that you don’t just randomly dip into the company funds. You should set yourself up – and any employees – in a formal payroll system and commit to the regular pay cycle.
As to the amount you should pay, there are a number of different schools of thought and it really comes down to you and the business’s financials. Some people suggest you should pay yourself the same amount it would cost to have someone else take over your role… but this might not be feasible if your business is still within its initial growth phase.
So perhaps instead you can decide upon an hourly rate that you are happy to receive or even a flat amount per month that the business can afford and that you are comfortable with. Keep in mind that as the business grows and profitability increases you can review and adjust this figure as often as you like.
Do you need to increase your prices?
If you have been running your business for a while but haven’t ever formalised your salary then it could be a good opportunity to review your pricing structure. Your business might appear to be profitable now but once you start to withdraw a proper wage how will that picture change?
Increasing the prices of your products or services, even just a little, could make all the difference to the business’s overall ability to pay you a living wage. Paying yourself regularly enables accurate reporting of the business’s running costs. If your labour isn’t included in your costings then you may well be under-priced. If you are unsure of how to determine these calculations we recommend seeking professional advice.
Business tax liability
Even though you are the business owner… that doesn’t necessarily mean that the business’s money is all yours. Depending on the business structure, the financial obligations can vary greatly and this is another reason why you should pay yourself a proper wage.
The last thing you want to do is to create business tax liabilities because you’ve withdrawn money that hasn’t been correctly accounted for… you need to make sure you are always complying with ATO regulations.
Ask a professional
We understand that every business is different and that there are various considerations at every growth stage. Here at North Advisory, we can offer you the professional guidance you need. We can help you determine your business’s current financial position and also assist with payroll systems and all the relevant tax obligations.