So your business is finally making good money... but you're not taking home as much as you'd like. Where's the disconnect?!
Chances are you aren't paying yourself enough. How much you pay yourself as a business owner depends on how much your business makes, how much you spend in expenses, and how much you'd like to invest back into the business.
Here's my process for determining how much to pay yourself.
Where Do Your Business Priorities Lie?
Bad news: There's no cut-and-dry formula for determining how much to pay yourself. Two business owners making the same amount of profit each year may pay themselves wildly different amounts. Why? Their priorities are different.
If your business is your sole source of income and your top priority is paying your bills and growing your personal wealth, you're going to pay yourself more. If your business is a side hustle and your top priority is scaling it, you're going to pay yourself less and invest more back into the business. It all depends on how you want your money to work for you.
That being said, you should be paying yourself out of your business, and you should be paying yourself well. At the end of the day, you are your business's greatest asset. You do most of the work, assume most of the risk, and should naturally reap most of the rewards. There's nothing wrong or shameful about paying yourself what you deserve.
Calculating How Much You Can Pay Yourself
Now that you're ready to give yourself that hard-earned raise, let's figure out exactly how much you should be paying yourself.
Do The Math!
STEP 1: Calculate your personal expenses.
If your business is your sole source of income, you have to pay yourself at least enough to cover your personal expenses. That's why the first step in this process is determining how much money you need to live comfortably every month.
Be sure to factor in emergency savings and debt repayment. Once you get this number, you can dig into your business finances.
STEP 2: Calculate business expenses and future upgrades.
How much does it cost to keep your business running every month? Those are your expenses. This might include supplies, software, office space, employees/contractors, and even your cell phone bill.
In addition to recurring expenses, you'll want to consider any business upgrades you're planning or saving for. For example, if you want a new computer in a few months, figure out how much you'll need to save between now and then. Then, add that amount to your monthly expenses.
Also, take into consideration how much you're saving for taxes and for emergencies.
STEP 3: Calculate your profit.
Your profit is equal to your revenue minus expenses. For example...
$100,000 annual revenue - $10,000 annual expenses = $90,000 annual profit (Not bad!)
For many small businesses, though, this calculation is a little more complicated. You may make totally different amounts month-by-month, especially if your business is new. In that case, calculate monthly like so:
$10,000 monthly revenue - $1,000 monthly expenses = $9,000 monthly profit
$7,000 monthly revenue - $1,000 monthly expenses = $6,000 monthly profit
As a business owner, you assume the risk of slow months so you can enjoy the rewards of busy months. You'll want to pay yourself accordingly.
STEP 4: Pay yourself!
Here comes the fun part: paying yourself!
Once you calculate your profit, set aside 30% for taxes and 10% for emergency business savings. You'll have 60% of your profit left over to do with as you please.
Some business owners pay themselves the entire 60%, especially if that 60% is equal to or close to the total of their personal expenses.
Others invest back into their business. You could pay yourself 50% of your profit and put 10% back into your business for upgrades and growth.
If you have multiple employees, you might also consider increasing the amount you save in case of emergencies. Instead of 10%, try 20%. That way, you'll have a small reserve to keep paying your employees with in case you hit a slow month.
At the end of the day, the amount you pay yourself is totally up to you. As long as you're saving for taxes and emergencies, the rest of your profit is yours to work with! Pay yourself what you deserve, keep a close eye on your finances, and reevaluate often.
A Word of Warning
If your small business is your sole source of income, I highly recommend speaking with a financial professional about how much you pay yourself. Your personal income can affect your future mortgage, car loans, and even student loan rates. If you pay yourself too little or deduct too much in expenses, your bank might not think you make enough money for the loan you want. If you're dreaming of a new home or car in the next few years, keep this in mind!
Ready to give yourself a raise?
You work hard. It's time you start paying yourself accordingly!
In my brand new course Be Your Own Bookkeeper, I'll teach you exactly how to manage your expenses, maximize your profit, and increase your personal income through your business - all without outsourcing your financial management. Click here to join the waitlist!
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