How to Start Paying Your Own Salary
- January 15, 2019
- Posted by: Quarles Business and Financial Strategists
- Category: Business Advice
How to Start Paying Your Own Salary
If you are a small to medium-sized business owner in Perth, it can be hard to find the funds to pay your own salary.
Starting up a successful business takes many hours of dedication and hard work — hours which you’d like to be getting paid for.
The inconvenient truth for all new business owners is that it takes money to make money. In the early days it can be tough to turn a profit, and all of your available funds will be spent on start-up costs and business investments.
You will have to undervalue the time you’re putting in to establish your business.
But it’s important to try and add yourself to the payroll from the outset. Otherwise you won’t get an accurate picture of your real profitability.
Not to mention that your personal expenses won’t go anywhere when your business expenses start to rise.
You don’t want to stretch yourself too thin and create additional stress and discomfort in your personal life, as this will also have a negative effect on your business.
On the other hand, if you pay yourself too much, your business might struggle financially. You need to strike the right balance. Here are 4 tips to pay your own wage.
Tip 1: Choose the right business structure
“Entrepreneurs not only want to succeed, they should also be thinking of protecting their business and their personal assets. But too many people stuff it up by not getting the structure right and the appropriate insurances in place from the start.” – Dr David Dugan.
When you are setting up your new business, you have four main business structures to choose from; sole trader, partnership, company or trust.
This may seem like an unimportant decision, but don’t be fooled!
Your business structure can have serious implications for your business, including your ability to pay your own salary.
Being a sole trader or partnership is the easiest to set up, requiring just an ABN and TFN. You’ll be taxed at your individual tax rates, and the end-of-year accounting is simple.
Company or trust status is more difficult to set up, and comes with additional benefits and costs. Your business becomes a separate legal entity, with reduced legal liability and some increased obligations.
The best business structure for you depends on the specifics of your business, but each one is worth considering. Making the right decision can help out your business finances and increase the money you have available to pay yourself.
For a complete rundown on the 4 business structures, check out our article The Complete Guide to Australian Business Structures.
Tip 2: Understand the difference between revenue and profit
Making the distinction between revenue and profit is important.
You should always pay your salary or wage out of your profits (i.e. after you’ve covered all your expenses).
If there isn’t any money left after paying all of your expenses, then it’s time to start increasing your profit. Look at what changes you can make to your business to either increase your revenue or reduce your costs.
A professional business advisor can help you identify the problem areas in your business. For example, you might be able to increase your profits by improving your business systems.
You’ll find it much easier to track your profits and figure out how much you can afford to pay yourself with the right cloud accounting software. It will also help identify areas you can make tax deductions.
With help from a professional business advisor and the power of accounting software on your side, you will be able to increase your profit and can afford to pay yourself what you deserve.
Tip 3: Manage your cash flow effectively
Speaking of accounting, you should also be effectively managing your cash flow.
Cash flow refers to the amount of money coming in and going out of your business, and is essential to your business’ success.
Managing your cash flow effectively will allow you to pay yourself, and all your creditors, on time and regularly.
Part of managing your cash flow is having efficient systems in place to manage your business revenue and expenses.
Cash flow forecasting programs like FUTRLI can help make your cash flow management much easier, and allow you to pay yourself the maximum salary you can afford.
Tip 4: Be tax efficient with your salary payments
The less money you are paying to the government in tax, the more money you’ll have to pay to yourself.
When it’s time to pay yourself, make sure you do it tax efficiently. This process will differ depending on your business and structure, but here are 5 pointers to get you started:
- Pay yourself a straight salary
- Take a minimal salary and pay the remainder in dividend payments
- Pay yourself in stock or stock options
- Pay yourself a salary plus annual bonus
- Create a written business agreement to pay yourself later
These are a few options for how you can save on tax while you pay your own salary. There are lots of ways to save on tax, including specific deductions, expenses and benefits.
To find out how to make your business more tax efficient, book a free consultation with our experienced accountants.
When it comes to paying your own salary, tracking and increasing your profits is the name of the game.
Equipping yourself with the right programs and finding ways to increase revenue and reduce expenses will help you free up the money to pay your own wage.
As your business grows, you can look at increasing your own salary or wage and finally getting some financial return for all your hard work.
Of course, that doesn’t mean that you are stuck on a low salary until then. The right changes to your business could land you a bigger salary than you think.
Find out how you can increase your wage by booking a free, no-obligation consultation today!