Advice to small business owners: Pay yourselves salary
At the Serdef’s online small business clinic, someone who signed himself “Alan R from Taguig” asked for advice on whether he should pay himself a salary in the small signage business he owns.
Here are excerpts from his letter: “I supervise my workers, talk with clients, do the bookkeeping, purchase the materials, prepare quotations and bids. Sometimes, I also do hands-on production, if the order is rush, side by side my workers.
“The business pays the bills and the salaries and leaves me with some nice profit ‘at the end of a contract’. But I’m not sure if I should get a monthly salary, too. Or should I just withdraw money I need personally from the business account from time to time like what I have been doing since I started?”
Alan R’s dilemma is not exceptional.
Most startup entrepreneurs are willing to forego a salary when their business is not yet solvent. They make early sacrifices in expectation of later rewards. This is understandable, but should not be done indefinitely.
It makes good sense for small business owners to pay themselves a regular salary. After all, they usually work harder than anyone else in the business. It is logical they should be in the payroll like their workers are.
Some entrepreneurs think the profit they make is all they are entitled to. But that is a mistake and is one of the most common accounting mistakes small business owners commit.
This is what Serdef counsellors advised Allan R:
You actually wear at least two hats in your business: as owner and as manager.
An owner receives a return on his capital or what is known as profit. An owner may also withdraw cash from the business in the form of drawings. These may be advances on the profit or a loan.
A manager/employee—which you are as well—is compensated for his labor in the form of salaries and benefits, including bonuses.
So, be sure to keep those two roles separate.
To gain a true perspective of the financial health of your business, your labor should be fully costed. Sporadically drawing money out of the business distorts its operating performance and endangers its financial health.
Ask yourself: If I sold my company or hired an outsider to run it, would it make money? If the answer is no, then you might just as well be employed rather than be in business.
Your salary need to be factored into your costing (and in turn into your pricing) as overhead expense. Needless to say, this has to be reckoned with, too, come tax-paying time.
Fix an amount you should think would be fair compensation for you. To do this, research on rates of people who own and manage the same type of business you have. You can also base your pay on the average income your business makes monthly. If business is good, you can even give yourself a raise, same thing you do for your workers.
Once the amount is fixed, draw your paycheck and save the rest of your income for future needs. To make this work, you’d need to separate your personal from your business bank account. Two accounts follow the rule of keeping things separate and without mess.
Note: Small business owners who need quick answers to operating problems or need business information may send inquiries to the Serdef small business clinic by visiting www.serdef.org or e-mail firstname.lastname@example.org.