Lets be honest, no one goes into business to not make money; even non-profits want to make money. But there have been countless businesses that failed because the owner/founder of the business was looking at what they could personally make from the business.
Instead, even as a business owner you should look at yourself as an employee of the business. Sure, you are the boss, but like anyone else you get a paycheck. It can be tempting in this situation to give yourself a huge raise whenever you feel like getting a new car, TV, etc, but that is the wrong way to look at it.
You might wonder why you should do this, but there are advantages to doing this.
- First it will allow you to have a set amount of money going out, and hence makes it easier to figure your profits and loss for a given time.
- It makes sure that you are feeding money back into your company. Your company needs to grow and without funds to do so, it will never move beyond a start-up.
- It can reduce stress for you, by giving you a set amount with each pay day.
- Setting a salary for yourself also keeps you from taking more home in a month when your business does well, which can come back to you if you then have a poor month.
There are a couple of different ways to setup your business and do this. You can setup your business as a LLC (Limited Liability Company) or you can incorporate your business.
- With a LLC you would not give yourself paychecks, but you would instead give yourself money as a Draw, as you are drawing funds from the bank account used for the business.
- This option, while providing liability protection, also means that you file one set of taxes.
- With a LLC you want to figure out what you want to be paid and give yourself that amount each pay period.
- Do not forget to figure your taxes and other payments, Social Security, Medicare, etc. You are still responsible for these and they will be separate from the amount you Draw each pay period for yourself.
- If you incorporate, then you would just pay yourself like any other employee of the business.
- This option has the advantage of keeping your taxes and your business taxes separate and profits from a business will usually be taxed at a lower rate.
- This option does also end up require more accounting work.
So now that you know a little bit about why and how to pay yourself for your business, lets talk about how to determine what you should pay yourself.
- For a long time people have been using a rule of thumb that your rent/mortgage should be 30% of your income.
- So for a simple amount of what to pay yourself, you can just take your rent/mortgage amount and do the math.
- If you pay $600/month in rent/mortgage, then you want to bring home $2000 per month, after your taxes and health insurance.
- You can also figure it by taking all your known bills and then adding extra for spending money when you go out.
- Rent/Mortgage - $600
- Utilities - $125
- Phone - $100
- Cable/Internet - $110
- Food - $150
- Gas(petrol) - $75
- Car/Home Insurance - $200
- So if you do not have many extra expenses each month, you could go under the above $2000.
- An important thing to remember when making this calculation, no matter which method you go with, is not to cut yourself short. Do not cut out parts of your life to lower what you are taking home.
- If your business takes off and you want to give yourself a raise, do it at one point in the year, like an annual raise at most businesses. Just keep track of how much more you are giving yourself.
So, have you done the math? Make sure you do, your business accounts need you to stay on top of them, and your home life needs you to keep on top of your bills.
Good Luck and Good Sales