A question I run into regularly with companies I’ve mentored and/or offered advice to is, “How do I know when I can pay myself?”. One of the toughest realities in starting/running your business is that you may be paying everyone else around you, but not you, for some time.
The answer is not cut-and-dry, as many items factor into the answer, however, one thing holds true – it’s a business decision. There’s a lot of personal stress, angst and indecision that already go into getting your business off the ground and running. However, when it comes to salary, it’s a numbers game.
Below are items to consider when deciding when and how much to pay yourself.
- Are you cash flow positive? Know your financials.
Whether or not your company is profitable is a different story. Does your company have enough cash on hand, as well as coming in the door, that if you were to take a percentage as payment, the company could continue cover expenses? If not, what actions need to be taken and what’s the forecast for getting there?
- What’s in your pipeline?
Combined with the above, are there enough sales opportunities forecasted to possibly provide the cash flow? How far out can you predict your company’s new and repeatable sales?
- Money not spent is money to be reinvested in the business
Any money not taken out for payment can be used for company growth, additional headcount and/or infrastructure. If you’re anticipating a large amount of capital expenses in the coming months, you should look at a balance between taking payment and preparing to spend.
- Evaluate the tax impact
Your accountant is an invaluable resource. Take the time to meet with him/her to review where the company is, how much cash is/could be available, as well as what the tax implications would be in both not touching it, and using it as your salary. If the expense forecast is low(er), leaving more cash coming in, depending on the structure of the business, you could be liable for tax on it as part of the owner’s pass through, and taking some as payment could offset that.
- Don’t Get Discouraged
Regardless of if you decide to start paying yourself through your business (or not), growing a business is a marathon, not a sprint. If you’ve done the diligence in forecasting and have a plan to generate cash flow, you’ll know exactly where things stand and what the road ahead looks like.
As you can see, it’s not a one-size-fits-all sort of answer. I’ve met business owners who only intermittently paid themselves, paid themselves for a while and then stopped, as well as those who started with small draws and increased that into real income as their businesses developed.
Do you have additional advice for getting yourself paid?