As a business owner, you make the ultimate call on what happens with all of the profits in your business. There are many choices – meaning many opportunities to make smart decisions that will help you grow your business and grow your personal wealth.
Choices are great, but that also means it can be complicate` d to decide exactly how much you should bring home personally from the business. How in the world do you decide what you should pay yourself as a business owner? Here are a few things to consider as you make your decision.
Consideration 1: How do you know what salary your business can support?
As a business owner, your profit in the business is never the same. When you are starting off, expect that it will be a while before your business can support your desired take-home pay.
However, remember that things fluctuate.
Check in on your revenue, expenses, and profit on a regular basis to make sure that you aren’t building up debt in the business to support your personal lifestyle.
If you are, this is a sign that you need to do a deep dive in the business to fix something that’s broken. It’s unsustainable and it’s a big red flag.
If you realize you are taking on debt to support your lifestyle, you need to figure out how to make your business more profitable. Focus on the essential expenses and investments needed to keep your business and home life running. Trim the extras and increase revenue to fix the issue in your business as soon as possible.
Once you know your business is profitable, then it will be time to determine how much you can take home on a regular basis. At this stage, you have a lot more choices.
Consideration 2: How much do you need to pay your bills at home?
Staying on top of how much you actually need at home is important. When you’re starting your business, it’s a balancing act between day job income, savings, outside investments, or even a line of credit.
As your business grows, this becomes less urgent but it’s still good to know what your watermark is for what you need at home. Especially as life changes – with a new house, extra kids, or just extra fun spending – you might not actually know what it takes to make everything happen in a month.
If you aren’t sure how to do this, check out my blog on How Much Money Do You Need to Be Happy, which will step you through how to calculate the number for your basic needs and your happy financial place!
Consideration 3: Are you paying yourself enough to save?
As a business owner, your personal balance sheet needs to be healthy, too. You need an emergency fund. You need to save for retirement.
Your business is the engine of your wealth building plan. However, you need more than just your business to create true financial security.
Even though technically on a balance sheet, you are wealthy – you can still make poor decisions that aren’t in your best interest if you are constantly cash poor. You need a healthy cash cushion and personal investments in addition to your business.
If your business doesn’t make enough for you to save some amount for retirement, your business isn’t making enough. If you don’t know what you need to save for retirement or you’ve never thought about it before, now is the time to consider your retirement plan. You can read my blog on 5 Strategies for Being Behind on Retirement as a jumping off point that can help you get started!
Business is a risky endeavor, and it’s unwise to wait until you sell your business to build up assets outside of your business. The business climate could change. Things happen outside of your control. And the government gives you tax breaks every year to save for retirement.
It’s important to have this piece of the wealth building puzzle beyond what your business is doing.
Consideration 4: Have you accounted for taxes?
When you consider how much you actually need to take out of the business, you’ll want to plan for your tax bill.
If you are paying yourself a salary with a payroll company, the company can withhold taxes for you for your actual take home salary. If you aren’t set up to pay yourself a salary, you’ll want to determine a percentage of your take home pay to withhold for taxes with your accountant.
In addition to what you pay yourself regularly, you’ll also have to consider your tax bill for the remaining profits and owner’s compensation.
You’ll want to sync up with your accountant to plan for this so you aren’t accidentally spending your tax bill money at home or in the business.
This number can vary wildly from your expecatiations if you have a particularly good or bad year. If things are changing, check in with your accountant to make sure you are keeping up with the fluctuations in your business.
Consideration 5: What does your enough look like?
Beyond what you need to pay for your bills, pay your taxes, and save for your future, what would you like your lifestyle to look like? Are you hoping to have another kid, buy a bigger house, or just go on more vacations? It’s good to think about what amount of money in your personal life would feel like enough. There can be the desire to want more, more, more – but it’s also a really good feeling to feel content and like you know what your enough is (or will be), even if that’s more than what you are spending now.
This is another consideration covered in my blog, How Much Money Do You Need to Be Happy.
Consideration 6: What investments does your business need?
If you are paying yourself what you need at home, don’t forget to consider what you need to have onhand to grow your business.
The cash flow you have now can fuel your future profits. Do you need to hire another employee? Would you like to launch another product? If so, what do you need to set aside to get that product off the ground? Would you like to learn something to deepen your craft so you can charge more as a consultant?
This is an easy place that entrepreneurs like to spend – a lot of us are very growth and learning motivated.
So consider what you really need to do right now vs. what would be nice to do right now.
The things you really need to do to grow may need to be prioritized before paying yourself more to supercharge your savings or upgrade your personal lifestyle.
But if you’ve reached that “enough” stage, you can choose. Do you want to spend your extra funds in the business or at home?
Consideration 7: Are you taking your profit?
Make sure you are considering your business expenses and that you actually are creating a healthy, profitable business for yourself.
How does your owner’s compensation compare to other businesses in your industry?
If you are deciding to spend more on business expenses because you want to, that’s one thing. But if you are taking home less than you should due to lower revenues or higher expenses than those typically seen in your industry, you should know.
An unhealthy business has less resilience to deal with the inevitable ups and downs of running a business long term.
Consideration 8: Think about the tax consequences
Once you know how much you need at home to live, to save, and to enjoy your life, you can consider the details about how to actually pay yourself to optimize your taxes.
I encourage you to let your goals at home and in the business guide you, and then let people like your financial planner and your accountant help you optimize based on your goals.