So here 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..
“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 in possible 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 month. Having a ‘pay” hit your bank account each week is important for your own self-worth and can help prove your worth to your other half!
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 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 t0 leave the house.
*If you trade as a trust, company or partnership you must have a business bank account for tax purposes.
How do I account for the money I take?
This depends on your set up. If your structure is more complicated than sole trader or partnership ask your accountant how they would like you to pay yourself. They should assess your financial goals and choose a method that is means you pay the least amount of tax possible.
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. 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 75%). The 30/30/30 rule is a little outdated these days and should only be used as a very vague benchmark.
How do I know when I can take money so I don’t run out next month?
The most confusing part of paying yourself is figuring out when you can afford to. 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?
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 honestly if you stick to it that is all it takes.
This is a simple version of what cash flow looks like
Why is there never enough to pay me something?
That is a great question!
Here are four big red flags to look out for if you are making money but never seem to have enough left to pay yourself a fixed amount.
1 – Not keep tracking of the little stuff
Are you dipping in to pay personal and household expenses without keeping track? Maybe you’re at the fuel station pumping some gas when you realise hubby’s pay hasn’t hit your account yet. You might find yourself at the supermarket checkout with just a few items so you use business funds. No harm right? The credit card bill comes in and you know you have been using it for business expenses so you chuck some of your business money on it. Sounds fair?
Well, it all adds up! All those bits of money here are there can result in huge chunks of missing income. There is nothing wrong with paying bills and credit cards with business funds… if you track it! Tracking can be a nightmare without… drum roll please… a separate bank account!
2 – The expenses that would NOT be covered if you were an employee
Let’s say you were making $3000 a month as an employee. Now you make $2000 a month so you’re thinking .. what is the point?.. You’re $1000 worse off right? Maybe, but maybe not! Add up phone bills, internet, insurances, car, fuel and all that other stuff you put through your business. Don’t forget the parts you can deduct at tax time for having a home office like gas, electricity, rent etc.
You might be surprised just how much your business is covering that you would be paying for out of pocket as an employee.
3 – Is PayPal messing with your cash flow?
PayPal accounts might be the best thing since sliced bread to retailers and shopping junkies alike but they can be a dirty big pit of money confusion if you’re not careful.
Money coming in is usually your sales/revenue/turnover/income (gosh.. why does there need to be so many names!). Money coming out should be for business expenses but often it is for stuff that has nothing to do with your business like app purchases, music downloads, shopping purchases, subscriptions etc.. Having a separate business and personal account can ease the confusion. *Yes, you’re allowed separate personal and business accounts.
I have analysed the financials of a LOT of businesses to help them understand where their money is going. You might be shocked at how much money can be diddled away with random spending from PayPal.
3 – The stuff that isn’t so obvious
Even if you have a super accurate Profit and Loss report (all programs like Xero, Quickbooks, MYOB will generate this for you) and it has a fat wad of cash showing as profit it is possible your pockets are still empty. What a Profit and Loss doesn’t show is all that money you pay off credit cards and bank loans for your business (they’re called liabilities).
How do I get to the point where I can pay myself a fixed wage each week?
If you were to ask me how important I think paying yourself a regular amount is on a scale of 1 to 10 I would say 10. It is important for your self worth, clarity around your business success, goal achievement and proving to others (husband, family, friends etc..) that you don’t need to go find a job!
If you want to pay yourself a fixed amount each week as a wage you need to stop dipping into your business bucket for random personal expenses. It gives you false (and often negative) sense of what is really going on.
The second step is to identify what you need to make in sales to cover your expenses and then how much extra you would like to pay yourself. Sit down with your bank statements, receipts and PayPal account print out. What comes out each month? How much do you have to sell to cover it? How much more do you need to be able to pay yourself?
What about GST/Sales Tax and Personal Income Tax?
If you’re GST registered (in Australia) then you need to account for that in your cash flow. I personally put 10% of all income away in an account each week. When it is time to do my BAS I always have an excess as I have GST to claim back too.
Personal Income Tax will be charged on your profit. So you know all those little personal expenses you were racking up all year? You will need to pay tax on those! At the end of the financial year your bookkeeper or accountant (or maybe you) will need to go through every single transaction and highlight business only expenses. They will take your income and minus business only expenses leaving behind the profit you pay tax on.
Can you see now why a business/separate bank account and PayPal are a must? If you mix up hundreds of personal transaction with business income and expenses you can waste hundreds or even thousands of dollars on accounting and bookkeeping fees. If you choose to do the digging yourself it can take days, and days, and days..
And super/retirement fund?
That depends on your legal responsibilities (some structures require you to pay). Speak to your accountant or financial advisor about your superannuation or retirement planning. There are often great incentives to make voluntary contributions but I shall let the experts help you with that one.