Paying yourself is something that catches a lot of women in small business out. It seems obvious right?. You make some sales and keep some money.. simple.. uh.. not so much. So now I know a lot of you are wondering;
"How the heck do you pay yourself?"
This isn't just a question of making sales, it is so much more than that!. It is the details of how the process works.
When can or should you start paying yourself?
How do you figure out the magical sales figure that will make it possible to pay yourself and what's the deal with taxes?.
When should I start paying myself?
As soon as you can is the best answer to that question. Being in business can be tough, without the financial reward why bother?.
You want to put yourself in a position as soon as you can to be able to transfer a fixed amount each week, fortnight or month. Having a regular ”'pay" hit your bank account each week is important for your own self-worth and can help prove your businesses worth to your other half.
Once you start that regular habit of paying yourself, even if it’s a small amount each week it’s so much easier than to focus on increasing that pay amount. You, as the business owner really do need to value yourself in your business, and part of doing that reaping a financial reward.
Who cares if you start with $30 a week, you don’t need to tell anyone!. It’s the habit that is important, growing the number then becomes much easier.
Do I need a business bank account?
YES. YES. YES. YES. YES.
Even if you don't sign up for an actual business bank account (as opposed to a personal account) you need a separate account that is just for business income and expenses. This goes for PayPal too!. If you receive funds from PayPal then use that account to pay for your shopping habit you're creating a bit of a headache for yourself. I will explain more about that in a bit.
If you don't have a separate bank account take your fine self down to your bank tout suite. If you have internet banking with most banks you can set up a new account without putting pants on to leave the house. It couldn’t be easier.
*If you trade as a trust, company or partnership you must have a business bank account for tax purposes in Australia. Please check the legal requirements in your country for the type of business set up you have.
How do I account for the money I take?
This is the piece that can be more confusing than just about anything else. Who do you tell, how do you keep track, can you just dip on into your account and help yourself? The answer is yes. You can.
For a micro or small business where you are trading by yourself, maybe you are in a partnership or you are in a company where it is yourself as a director, where you don't have any investors or anyone else to answer to then yes you can, dip on in it when you like.
If you have a business partner, obviously this should be by mutual agreement to avoid them wanting to shank you next to the water cooler when they discover you have emptied the business bank account.
If you’re a sole trader, that means you don’t have a company or partnership, then the mechanism is quite simple. Just transfer the money from your business bank account to your personal account. It’s good practice to track that transaction, so you know how much you’re paying yourself.
This is why I prefer women in business to establish regular set pay amounts, amongst other reasons, otherwise, you’re dipping in and out and it gets messy. It’s incredibly messy when you randomly pay for groceries or fuel or the odd bill from your business earnings.
Keep it clean!
Your accountant then needs you to go through bank statements and highlight what’s personal, and you’re not going to remember by the time you get around to doing your taxes. It ends up being a task on your to-do list that gets done at the very last minute, and it’s just ugly.
If you’re a company the mechanism is the same, just move the money from your business account to your personal account. The difference will be how you record that transaction, or what that transaction is called.
I don’t want to dive too deep into tax minimisation here, it will bore most people and it’s a question for your accountant, I am not an expert.
But, to touch on it really briefly, once you’re paying yourself over a certain amount per year, usually in excess of $100K there might be some tax savings by having a more complicated business structure like a company.
In Australia we call those Private Limited Companies abbreviated to PTY LTD, in the USA you have Limited Liability Companies or LLC’s, the UK has Limited Companies or LTD’s and so on.
If you do trade via a company, at the end of the financial year your accountant will go in and change anything you have misallocated anyway. Especially if that misallocation will cost you more in tax. That’s why you pay them the big bucks.
The important thing is you or your bookkeeper keep clear records, so your accountant can find the information they need quickly and easily and so you know how much you have paid yourself.
Your accountant can walk you through the costs vs the tax savings of having a company structure. The more complicated your structure the more you will pay in maintenance costs per year. More complicated structures also come with more rules and regulations, but if you’re ready for that step then a good accountant will support you to meet your obligations.
There are also other reasons to trade as a company, like protecting assets in if you’re in a high-risk industry. Once again, call your accountant if you’re unsure.
For sole traders and partnerships, you simply transfer the money from your business bank account to your personal account and then either record the transaction in your bookkeeping program or spreadsheet.
I use Xero which automatically tracks the transaction so my bookkeeper knows where the money has gone.
Is there a formula for the amount I am able to take as pay?
Like a fixed percentage?
I wish it was that easy! There is no fixed percentage. I saw a business coach blog about the topic, she was advising that you take 30% to run your business, 30% to put back into stock and 30% to pay yourself.
Aside from the fact that those numbers don't add up it isn't a good approach, anyway.
There are some industries where a version of that rule can apply, like restaurants, but there is no rule that applies to all businesses. You may need more than 30% to cover business expenses. If you have a business like mine you will be taking a LOT more than 30% to pay yourself (I take closer to 70%).
Give me an answer, woman!
I know what you want is a very specific answer to figure out how much to pay yourself. I wish I could easily say apply this formula and you will always have enough for your bills and to pay yourself, but that is not how it works.
What I can share is the Profit Lovers approach to paying yourself. It is not to wait until there is excess money sitting in your bank account. That’s the crumbs, Profit Lovers aren’t begging for crumbs.
The Profit Lovers approach is to choose a number as a monthly pay goal, write that number down, then add your monthly expenses and cost of sales to that number.
If you don’t know your expenses, and or your cost of goods or cost of sales, then it’s time to sharpen your knowledge.
Once you have your goal amount added to your monthly expenses and cost of sales you can use that number to calculate how many customers, clients or sales you need each month to reach that goal, cover your bills, cover your expenses and cover your cost of goods.
Bit confused? If you need more help because these numbers are completely foreign to you or you have a vague idea but can’t quite pull them all together then stick with me until the end.
How do I know when I can take money so I don't run out next month?
It’s one thing to figure out how much you want to pay yourself, but then you need to figure out when you can pay yourself. How do you know if you will have enough cookies left to pay next months bills? What if you don't make any sales next week or next month?
If you hate numbers then you will loathe this answer. Your cash flow forecast tells you when you can pay yourself.
A simple cash flow that lists the money you expect to come in (sales) based on history and the money you expect to go out (expenses) based again on history. You will soon see what is left over for you to pay yourself.
You can add in a regular payment to your money in/money out tracker (if you have the Profit Lovers Plan and Track) so you can see what the next month is likely to look like. It will take a few months of practice to get it right, but if you stick to it you find it easier and easier every month.
Members Club breaks all of this stuff down for you into step by step lessons that are usually no longer than 25 minutes, and each lesson comes with support materials like spreadsheets to guide you.
Plus, there is a private members group so if you’re lost I will answer your questions. In Members Club, we will create a simple cash flow plan and a Pay Me Plan.
Now if all of this sounds like a horrible way to spend your time, then you are missing part of the excitement of being self employed. You're missing this golden opportunity to use these numbers to shape your business into a health money making venture.
These numbers could put you and your family on an entirely different path in life.
They could provide you with the revenue to travel, invest in music lessons or sport lessons, increase your insurance coverage, plan for your retirement, grow your assets, buy an investment property, be more charitable, take care of your parents, the list goes on.
Our earning potential is only limited by us, and with the right plans in place that aren’t complicated or nearly as scary as you think you can take advantage of that business potential.
You have so much power to influence your sales and income, if you take the time to figure out your goals first and then you come up with a plan to reach those goals.
If you’d like to get started with this process of paying yourself regularly and for it to be a really planned and comfortable process, then make sure you opt in below and download the Profit Lovers Pay Yourself Checklist.
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