You own the business - but are you paying yourself enough?
One of the reasons most of us go into business is to create a better life for ourselves and our families. But somewhere along the way, it's very easy to become the person who gets paid last.
You pay the staff. You pay the suppliers. You pay the rent. You put money aside for GST, tax and super.
Then you look at what's left and decide what you can afford to pay yourself.
In the early years of a business, that can be completely normal. You might deliberately take less while you're building your client base, investing in equipment, hiring staff or simply getting the business established. But if you've been in business for a few years, you're working huge hours and the business still can't afford to pay you properly, it's worth asking why.
1. What can your business actually afford to pay you?
Before deciding what you want to pay yourself, you need to understand what the business can sustainably afford.
Your business still needs enough cash to cover things like:
wages and super
suppliers
rent and overheads
GST and PAYG
income tax
loan repayments
upcoming expenses
a reasonable cash buffer
What's left after those commitments gives you a much better idea of what the business can afford to pay you.
And this is where profit and cash flow are very different things.
Your Profit & Loss might say you've made $100,000, but that doesn't necessarily mean there's $100,000 sitting in the bank waiting for you to take it out.
Understanding the difference is important before setting your own pay.
2. What would you have to pay someone to replace you?
This is one of my favourite questions to ask business owners.
Imagine you decided tomorrow that you weren't going to work in the business anymore.
What would you have to pay someone else to do your job?
Think about everything you actually do:
managing staff
dealing with customers
quoting jobs
delivering the work
solving problems
managing suppliers
making decisions
working after hours
carrying the responsibility of running the business
If you needed an experienced person to do all of that for 38–40 hours a week, what salary would you have to offer them?
Now compare that with what you're currently paying yourself.
If you're working 50 or 60 hours a week and effectively earning less than one of your employees, that's something worth looking at.
3. If the business can't afford to pay you properly, why?
This is where the conversation becomes much more useful.
Rather than simply saying:
"The business can't afford to pay me more."
Ask:
Why can't it?
There could be several reasons.
Your prices may be too low.
Your gross profit margin might not be high enough.
Wages or overheads might have increased without your pricing changing.
You might be doing too much low-margin work.
You could have too many staff for your current revenue.
You might be carrying significant debt repayments.
Or you may simply need more sales.
Once you understand why the business isn't generating enough profit, you can actually start doing something about it.
4. Should you take all the profit out?
Not necessarily.
There is a difference between paying yourself properly and emptying the business bank account.
Sometimes the smartest decision is to leave some profit in the business and reinvest it.
That could mean investing in:
another team member
better systems
equipment
marketing
a new website
training
technology or AI
developing a new service or product
If spending $20,000 today could increase the profitability or capacity of the business significantly over the next few years, that may be a much better use of the money than taking it all personally.
The important thing is that the investment should have a purpose.
Don't spend money just because it's "tax deductible".
Ask: What return should this investment create for the business?
5. Don't forget how you pay yourself matters too
How you take money from the business will depend on your business structure.
A sole trader taking drawings is different from a director taking money from a company.
Depending on your structure and circumstances, money may be paid through:
wages or salary
drawings
director loan accounts
dividends
trust distributions
There can be very different tax consequences depending on how money is taken from the business.
So don't simply transfer money to your personal account and assume it's all the same.
What should a successful business eventually be able to do?
For me, the goal isn't simply to build a business with impressive revenue.
A healthy business should eventually be able to:
Pay you properly.
Pay its team properly.
Meet its tax and other obligations.
Maintain healthy cash reserves.
Reinvest for the future.
And still generate a profit.
If you're turning over $500,000, $1 million or more but still struggling to pay yourself a reasonable income, increasing revenue alone may not solve the problem.
We need to understand what is happening underneath that revenue.
We'll help you run the numbers
If you're not sure what your business can realistically afford to pay you, we can help you work it out.
We can look at your profitability, cash flow, pricing and costs and help you understand what needs to change to get the business paying you what it should.
Because ultimately, your business isn't just there to keep everyone else paid.
It needs to work for you too.
Get in touch with the C & Co team if you'd like help running the numbers.