How much should you pay yourself as a business owner, depends on how much your business can afford, market pay rates, and whether reinvestment could pay dividends.
Being the boss means you get to make all the big decisions about your business – including how much to pay yourself in wages, salary or drawings.
As the owner, you might need to underpay yourself in the early stages of building your business, so you can reinvest the profits. But your time is valuable – and you need enough money to pay the bills. So how can you find the right level of pay? It has to be enough to keep the mortgage paid, while also building a thriving business.
If you’re trying to decide how much you should pay yourself as a business owner, here are a few questions to consider:
- What can the business afford? – You need to leave enough cash in the business to keep it ticking along, pay your basic costs, and meet your tax obligations. Once you’ve considered all those outgoings, how much does that leave you as a potential salary? We can help you work out what that number is, so you can establish a sustainable rate of pay.
- What’s the market rate for your role? – What would you have to pay someone to do the work you’re undertaking in this business? Maybe you wouldn’t actually be able to find anyone to work the same long hours, but if you were hiring someone with your experience, to do the same sort of work for 40 hours a week, what would they expect to be paid? That number is a good starting point for thinking about your own salary or drawings. If you’re being underpaid, it’s time to think about ways to grow your profits. If you’re being overpaid, congratulations on building a highly profitable business!
- Could reinvesting profits grow your income faster? – You can take all the profits out of your business, which should give you a strong and sustainable income. Or, could you reinvest your profits and grow the business faster, leading to a higher income in the long-term? You might choose to spend some of your profits on advertising, a better website, or developing a new offering, for example. Or you could pay for assistance in some area of the business. If the investment leads to higher growth, it might be well worthwhile.
- Personal financial needs are equally important – Consider your living expenses, financial goals (e.g., saving for retirement, paying off personal debts), and the lifestyle you want. Your salary should strike a balance between covering your necessities and allowing for some personal savings and investments.
- Economic Conditions and Market Volatility: – Keep an eye on the economic conditions and market trends relevant to your industry. Economic downturns or unexpected market volatility can impact your business’s revenue and profitability. During such periods, it may be necessary to adjust your personal compensation downward temporarily to ensure the business remains financially stable. Conversely, in prosperous times, you might have the opportunity to increase your compensation. Being adaptable and responsive to external economic factors is vital for sustaining your business’s financial health and your personal financial security.
Remember that your compensation can be a combination of salary, bonuses, and dividends, depending on your business structure. Consulting with your financial advisor or accountant will ensure tax efficiency and compliance with relevant regulations.
We can help you run the numbers to figure how much you should pay yourself as a business owner
As Business Advisors, this is the kind of stuff we relish in. Let us help you figure out how much your business can afford to pay you, analyse the potential gains of a business investment, or weigh up the pros and cons of hiring someone to help you.
Get in touch, we’d love to hear from you.