New Business: How Much Salary Should You Pay Yourself?
When you have made the decision to start your own business, you will have spent time preparing your business plan, researching key suppliers and undertaking market research into the industry and niche that you are joining. One area that is often overlooked is how much you should pay yourself. If you pay yourself too little, you will struggle to meet your personal financial obligations, and too much, you run the very real risk of jeopardising your business in the long run. So how do you get it right and find a balance that is right for you?
Understand what your personal financial needs are
It can be especially hard to calculate a salary when you are a start-up business as you are not likely to generate a profit in the first year of trading. This does not mean you shouldn’t draw a salary. You need to! Review your personal finances so that you can get an accurate picture of what you need to meet your financial obligations.
Having personal financial worries will impact your ability to make wise business decisions, so it is important that you don’t unnecessarily burden yourself. You can use a credit card from Vanquis
to spread the cost of your living expenses and improve your personal credit rating. You need to pay yourself an adequate salary to ensure that you can live comfortably so that your productivity and business is not influenced by external factors.
Understand the difference between revenue and profit.
Your business bank account may be healthy, but that does not give you the green light to access the money. You need to have a clear understanding of what is profit and what is revenue - there will be a marked difference between the two.
Revenue is the money that has been generated by sales before any expenses have been deducted.
Profit is the income that remains from the revenue once expenses have been subtracted.
The expenses deducted from revenue to calculate the profit
are things like insurance, employee salaries, taxes, rates and supplier costs,etc. The profit your company makes is the figure that you should consider when calculating an appropriate salary.
Understand what you can claim from the business, and what you can’t
Depending on where you live, you can claim for certain things from the business such as mileage, new computers and equipment, so make sure that you take advantage of the allowable expenses
– these do not include things that you use in your personal life, but there are categories of expenses that you may have been paying from your personal pocket. Check with your accountant if you are unsure or need further clarification.
You will be able to gauge when it is not appropriate to pay yourself. If you are unable to pay employees or you have money outstanding to creditors or suppliers, you should pay them first -others take precedence. It can be hard to strike the balance between keeping your business cash rich or yourself, but you must spend time to find it.