As a creative, we can get so wrapped up in the process that we forget to pay ourselves! Far too often, in order to ensure consistent cash flow, more than half of business owners have at some stage ended up not paying or underpaying themselves.
Especially when you’re responsible for monitoring and adjusting all of your expenditures as a business owner, paying yourself a salary can feel like an additional cost that can easily be avoided. But remember, this should not be looked over – especially for mental health reasons. More than three in five founders surveyed by finance technology brand Kabbage reported feeling anxious due to business cash-flow problems, which will only be heightened if they’re struggling to make ends meet at home.
When you pay an employee, you are acknowledging them for their time, work and services. It makes that employee feel worthwhile and incentivises them to do work – especially the slightly less enjoyable parts of the process. Sacrificing payment to yourself can also impact your personal life, which will affect how you’re able to run and grow your business. You might begin to lose motivation and edge into burnout if you’re not being rewarded for your work.
How a founder decides to go about paying themselves depends on a number of factors, and the amount might change over time. For instance, an early-stage founder might pay themselves the absolute minimum, whereas a business that has consistent revenue can afford to pay its founder a competitive salary. It’ll also depend on your industry and the legal structure of your company.
There are certain pillars that should be taken into consideration as a business-owner and/or freelancer when it comes to paying your own salary:
Work out your expenses. A lot of the decisions around paying yourself depend on your existing cash-flow needs, including expenses and projected profit. It’s also realistic to assume that it probably won’t be lots to start with. If you want to pay yourself more as you grow, you’ll need to make a plan and keep a close eye on your finances.
Know your legal structures. This will depend highly on where your business is based and the legal way that it’s registered. For instance, if you’re a freelancer or sole trader, you can usually draw money straight out of profits. On the other hand, as a company, you might have to factor your salary into wider financial plans. It’s best to have an accountant involved and to keep records as best as you can.
Keep your accounts separate. It’s important to keep your business and personal banking accounts separate to prevent any tax confusion. This will make bookkeeping and tax filings easier and less costly. It also helps people understand how the business is doing. For example, if you have to keep putting your personal money into your business account, it’s a clear indicator that revenue is lacking. Remember to be as consistent as possible with how much you pay yourself, to avoid any tax confusion. Mentally as well, this is important in order to separate your personal and professional self.
When it comes to knowing how much to pay yourself, we’ve got you covered:
What are your expenses- both personal and professional? If you don’t already have a budget, it might be worth creating a profit and loss statement for your business. This is the simplest financial statement you can make for a business – it’ll give you visibility of all the cash coming in and out.
Make sure you have an emergency fund. Depending on your lifestyle and options (could you stay with parents or relatives if all else was to fail?), some say between three to six months salary of savings does the job. Even if the difference between your revenue and costs is enough to factor in your salary, you should still put some money aside for spontaneous expenses that might arise. Conventional wisdom suggests having three to six months of expenses banked away just in case. For many small businesses, this won’t be possible – but it’s something to aim at.
Don’t under or over skimp on what you need. We recommend paying yourself like you would any other employee on your payroll, so that your salary is treated as one of the fixed costs of the business. If this isn’t possible without your business going into the red, you’ll need to look at ways to either increase income or minimise expenses. If you’re paying yourself from your profits, your business needs to be breaking even at the very least, and you should be able to guarantee that there’ll be consistent enough revenue to factor in your salary.
Give yourself a raise when appropriate. Say your business’ revenues have grown by 20% over the past year and you anticipate that growth will continue in the future. You can adjust your own salary along with that growth – and, ideally, increase your team’s salaries accordingly, too.