How Much Should Business Owners Pay Themselves?

The question of how much a business owner should pay themselves hit the headlines in Australia recently. For established SMEs, suitable business funding and healthy cashflow are the keys to happy earnings.

Boost Juice founder Janine Allis recently told SmartCompany that “the smartest thing you can do as a new business owner is put your wallet away.”

As it was intended for early stage entrepreneurs, this seems like sound advice. That is because, when you are trying to get a new idea off the ground, securing business funding is notoriously difficult. Without assets you probably won’t be eligible for a business loan from a bank, and if you aren’t yet trading you can’t use cash flow finance.

At that stage, every dollar you don’t have to raise through business funding makes your life easier.

Established SME Owners Deserve a Fair Rate of Pay
Of course, many budding entrepreneurs are already familiar with the discipline of getting by on a shoestring personal budget – simple necessity taught them that. For those that have got a little further with their business, the question of how and how much, to pay themselves is a surprisingly divisive one.

Some entrepreneurs prefer to remain focused on growth, even when their businesses enjoy robust revenues. Elon Musk, for example, would prefer to earn no salary as CEO of Tesla – but he is obliged to take the $37,000 a year that is minimum wage in California.

Other entrepreneurs simply take what they need to survive and plough all their profits back into the business, investing for growth that will eventually pay off big time when they sell the venture.

For long term owners, however, there is often no immediate plan to sell. We have argued before that all SMEs should be ready for sale. But that is not to say that you necessarily will sell. In the meantime, it is reasonable to pay yourself a decent salary as managing director, and indeed to take some of the profits out of the business you have built.

One approach to this is to pay yourself a modest wage and then take a dividend at the end of the year, once everything has been accounted for and you know what is left over. That is not practical for everyone, however, and you should arguably have a good enough grasp on your finances at all times of the year to be able to work out suitable personal remuneration.

Control Your Cash Flow
In order to pay yourself a regular wage that properly reflects the income being created by your business, cash flow is the key metric to consider. When you compare the actual money that your company receives each month to what its outgoings are, you will have a good idea of how high your salary can be.

The problem for many businesses is that they don’t really know how much money they will get in any given month: they plan for their work and know what they can deliver, but when they get paid is down to their customers. In order to have a closer control over cash flow, and therefore get more certainty in your own personal finances, services such as invoice finance or invoice factoring can be used. These forms of business funding ensure that you receive most of your money as soon as you issue an invoice.

They not only give you clarity and certainty for planning purposes, they can be a powerful and economical way to raise funds for investment too: instead of waiting for the profits to materialise, invoice finance means you can invest your own money today!

So What is a Reasonable Wage?
It is important to note that determining your salary as a business owner is not the same as working out what your time is worth: that is a different equation altogether which should reflect personal choices and time management, as well as non-cash value you are creating through your entrepreneurialism.

The average salaries of Australian business owners surveyed recently by SmartCompany was around $110,000. This reflects an entrepreneurial survey sample, which included a number of start-ups. Nearly every founder paid themselves nothing at the start of their business and didn’t start paying themselves a salary until one or two years into the business. The lowest starting salary for a business owner was $50 a week, and the highest was $150,000 plus dividends.

For healthy trading businesses with a regular growing balance in their accounts receivable ledger, it is not unreasonable for owners to pay themselves a decent share of their ongoing profits. With suitable cash flow planning, that can be done as a regular salary to the benefit of both owner and business.

“Get Tomorrow’s Cash Flow Today”

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