A 10-Step Guide To Setting Your Salary as a Business Owner

By Kaleem Ulah

November 7, 2023

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When it comes to finances, managing a small business's costs can be challenging. There are costs associated with the vendors, the rent, the utilities, and the salary of the team members. Because of this, you won't give much care to your income. However, owners must pay a fair wage and incorporate the associated expenses into their financial plans.

If you keep a close eye on your monthly income and how it impacts your cash flow, you can avoid difficulties for yourself in the future. Small businesses typically have razor-thin profit margins, so you need to keep a close eye on them to avoid causing problems for yourself in the future. We hope that by reading this guide on how to pay yourself as a business owner, we will help you prevent any problems that may arise. Let's get started so that we can walk you through all of the steps that you need to follow.

Why take a salary if you're the business owner?

The primary rationale behind taking a salary as a business owner is that it enables one to determine and control the maximum amount of money that can be drawn from the company's reserves at any given time. However, suppose the owner of a small business forgets to set a specific number as his compensation. In that case, the employer will have difficulty keeping accurate track of the expenditures incurred by the company while also maintaining proper bookkeeping records.

In addition, once an employer has agreed on a set pay for himself, he will want to consider new strategies for developing the firm, allowing him to ensure that it operates without any problems. These non-tangible aspects of running a business, such as setting one's wage, are regarded as valuable motivators by those who own businesses.

When should you start paying yourself as a business owner? 

If the owner of a small business is new to the industry, they may need a firm grasp on when it is appropriate to begin taking a salary. When a firm is in its early stages, and there is a limited amount of money available to ensure that everything runs smoothly, the company's owner may put his income at the bottom of the priority list. An entrepreneur, on the other hand, is aware that once the revenue from the business stabilises, he will be able to pay himself. Before you decide to take a salary as a business owner, you need to ask yourself the following questions if you operate a small business or are just starting in the world of entrepreneurship:

  • Has the business achieved profitable levels of revenue?
  • Does the company have a reliable projection of its revenue, which is necessary to expand the business?
  • Are all of the transactions conducted behind closed doors?

If the answers to the questions above are "yes," then the business owner is in an excellent position to compensate himself. It indicates that the companies that have progressed past the beginning period have reached a stable position in the market, at which point the employers are required to pay their employees the compensation of a business owner.

10 Tips to follow before you start paying yourself a salary

It is essential to manage your money as a business owner so that you receive payment for yourself. We will assist you through the process by giving you these top ten tips to follow.

1. Figure out your monthly net income

What is your total income after taxes? This serves as the basis for your owner's compensation structure. It is essential to be able to calculate net income to ensure that your company will be able to pay its bills before realising any profits. If you take money out of your company at random without first determining how much money you will need for your expenses, you will soon be boarding an aircraft to Debtsville.

After deducting your company's operating expenses from your gross revenue (all of the money that comes into your company), you will arrive at your net income. It is a profit for you. For this, a complicated calculator is not required at all. You may quickly determine your monthly net income by running a Profit and loss report for a monthly period from within your bookkeeping software. This report will show you the financial results of your business.

2. Consider staff salaries and contributions

Keep in mind that the amount of time that you put into your company may vary significantly from the amount of time that your key workers put in. And although you certainly don't want to underpay yourself, you also shouldn't cap your pay just because you believe your hourly earnings are higher than those of your second-highest employee.

After all, this is your company, and while you might put in 50 hours one week, you might put in 65 the next. It all depends on how much time you have available. Therefore, your remuneration should be commensurate with the flexibility of your time commitment. If you base your payoff on your hourly responsibility, then you need to ensure that your calculations consider the additional time that you will be putting in.

3. Keep your personal and business finances separate

If there is no clear boundary between your personal and business funds, it might be simple to get the two entangled with one another. The first step toward building your salary as an entrepreneur is to develop a systematic strategy for keeping tabs on the money coming in and going out of your business. To get started, you should get a business bank account and then transfer all of the income and expenses of your firm into that account. In addition, if you want to assist in establishing your credit, you might apply for a business credit card.

4. Figure out your company's debts

You realise that you must now pay yourself, correct? Not true! You will now be able to pay off the debt associated with your firm. You'll be grateful in the future. In this stage, you will begin by determining the total amount of the minimum payment that is required each month for your debts. If you have taken out a loan, the lender will expect you to make at least the amount needed each month.

Add up the minimum payment that you have to make on all of your credit cards and loans. In the end, after the process is complete, you will have the opportunity to raise your payments if you have surplus funds remaining after you have paid yourself. Also, remember that the interest you pay on your loan is deductible from your taxes.

5. Know about your investments

As a result of the ongoing expansion of their businesses, all business owners are interested in determining where they should put their money after they have satisfied their financial obligations and paid their taxes. Before beginning to write paycheck stubs for employees, every employer ought to exercise extreme caution about the investments. It will help him realise where he should save money to manage many duties, such as new recruiting, brand management, equipment acquisition, employee training programs, website development to have a presence on the internet and emergency funds. He will be better positioned to grasp how much salary as a business owner arrives in his bank account once he has set the amount for all these and other categories.

6. Have a practical approach

When an employer is also the owner of a business, they are allowed to receive pay once all of the company's financial matters have been resolved. He needs to have an evident and honest understanding of the fixed expenses, variable expenses, instalments, and other additional charges associated with the company. Evaluate the situation and decide how to proceed based on the activities taken. Even if there might be a set plan in place for the company, a business owner is still responsible for making decisions that are practical and appropriate for the circumstances by doing an in-depth examination of the differences and similarities between his individual preferences and the requirements of successfully operating the company.

7. Double check

After the business owner has evaluated both his requirements and the state of the business, he will have a clear idea of how much money he will take home each month. He must have an evident understanding of the business's expenditures, the payments for business debts, the savings, and his requirements. As soon as the employer is aware of his priorities, he will be able to determine what he needs to do with the additional amount of money made via the business, and he will be able to take the leftover percentage of the income as his wage.

Suppose he notices a significant discrepancy in the sheet and learns an imbalance in the money spent and saved. In that case, he always has the option to redistribute the amount of money set aside for each aspect of the company. An employer can earn a higher wage as a business owner by focusing on the company's demands rather than their requirements. For this to occur, he needs to determine his priorities in advance, as it is only then that he will make the efforts necessary to earn a profitable income for the company.

8. Pick a payroll method

You will need to select a payroll system before paying yourself a salary. It's up to you whether this is a manual system or a software system. You will be responsible for keeping accurate records of your salary payments, as well as any taxes and National Insurance contributions that are withheld from your compensation.

9. Create a bank account

You will need to create a distinct bank account for your company if you intend to pay yourself a salary through it. This will make it much simpler for you to maintain track of the financial aspects of your company and to guarantee that you are paying yourself a salary in a manner that is trustworthy and constant.

10. Make consistent payments to yourself

Establishing a timetable for yourself is a brilliant idea if you want to make sure that you are giving yourself a wage consistently. This can occur once a week, twice a week, or once a month, depending on your preferences. Make certain that you are paying yourself an appropriate amount and that you are maintaining accurate records of the payments that you have made to yourself.

3 Common mistakes you should avoid when paying yourself

You can make these mistakes if you are not careful. Therefore, you should check the common mistakes you can make when paying yourself.

1. Combining one's personal and professional finances

Always maintain a wall of separation between your finances and your business finances; this is a fundamental principle of business. Suppose you use a business credit card to pay for personal expenses or do not move your pay or owner's draw from your business account to a personal account. In that case, this might lead to accounting issues and make it more challenging to obtain a loan for a small business.

2. Not including taxes in the budget

Because taxes are not withheld from the beginning of the owner's draw method, you must set aside some of each draw specifically to pay those taxes. In addition, as the owner of a firm, you are responsible for making quarterly tax payments; most accounting software can assist you with this task. You must account for it in your budget to avoid receiving a significant tax bill, which you might be unable to pay if you don't have the money.

3. Not being consistent in the payment

You won't pay yourself at first, but your remuneration should be a part of the strategy that you have for your business. To gain a better understanding of what is required for the expansion of your business, the financial projections you create should contain an estimate of the amount of your pay or owner's draw.

Conclusion

The potential for the company's growth is the most critical factor determining an entrepreneur's salary. If you are confident in the expansion of the business in question, you would be better suited to making an investment in the company rather than waiting out a time of slow market activity to emerge as a market leader by the scope of your company's operations. If you aim to expand it only to maintain a small business size without much expansion, then it would be preferable to grant yourself wage gentle raises to keep yourself financially well-supported on a personal level.

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About the Author / By Kaleem Ulah

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Kaleem is CEO & Author at "The Kalculators". With more than 10 years of experience in financial services, He built Kalculators to transform your financial challenges into strategic triumphs!

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