This is a repost of a previous blog from The Icehouse in 2019. Since we first published this article we’ve experienced COVID-19, multiple lockdowns, the introduction of wage subsidies and proposed changes to the minimum wage. However, the philosophies and ideas around what you pay yourself as an owner remain the same.
Doing something you love and getting rich from it is a wonderful dream. However, when it comes to paying yourself, it’s surprising how many business owners don’t know where to begin.
It’s also very understandable. Deep in the minutiae of setting up and then running your business, one of the easiest things to overlook is your own salary.
Should I, can I, pay myself?
‘How do I pay myself as a business owner?’ is a question we get asked a lot. We’re also asked; ‘When can I pay myself?’, ‘How much should I pay myself?’, ‘How much can I pay myself?’, ‘What do other owner-managers pay themselves?’.
These are great questions and no wonder owner-managers are confused. One US survey discovered that 51% of successful entrepreneurs delay or reject paying themselves to benefit their business (Kabbage, a US-based small business funder). Moreover, 26% went 2-6 months without an income, and 25% went 6 months without paying themselves.
The average NZ salary
The median annual income for a New Zealander is $52,100 before tax. The average full-time working male earns $56,700. It’s approximately $47,500 for a female (Statistics New Zealand, 2019). Useful to know, because you need to earn a living.
There are several ways you can pay yourself as a business owner – and none of them is right or wrong. Whatever works best for you. Firstly, set a start date for when you can start paying yourself. When will that be?
Paying yourself straight out of your revenue can be a problem because fixed-costs, overheads, taxes and payroll also need to be factored in.
As an owner you can link your pay each month to your business profits. Make it a reasonable range and stick to that – based on forecasts for an ‘average’ month, rather than a ‘bumper’ one. You’ll have more money to allocate to the business when you have a good month. Plus, there will be no nasty surprises if you have a tough month.
Seek professional advice
Other popular options include paying yourself a smaller salary and making up the rest in dividends – if you own stocks and shares in your company. This is a sensible option for long-term growth.
Taking an end-of-financial-year bonus can also work well as it will incentivise you throughout the leaner months, and doesn’t take cash away from investments already made in other areas of the business.
Another option is to pay yourself at a specified time rather than from day one. Seek advice and, as always, keep it realistic and sensible. One year? Two years? What’s achievable?
The most important thing to remember is that you have to live. Starting up a business may seem like everything, but it isn’t the only thing in your life. All owner-managers and entrepreneurs have to find a balance, and having an income makes that balance all the more enjoyable.
Attached to all these ideas are tax implications so, as ever, get the best advice available.
What am I really worth?
It’s easy to undervalue yourself. You’re putting everything into making your business a success. Underestimating your colossal physical and emotional contribution to the business can affect your morale and even your efficiency. So it makes sense to pay yourself a fair and realistic amount so you can have a life outside your business.
And remember the big picture. For example, it’s rational and normal to pay your early employees a larger salary than yourself. After all, you’re paying for expertise that you may not have. Don’t worry – they’re there to help you grow and relieve a lot of the burden.
What next?
Financial wellbeing is the lifeblood of your business. Always speak to your trusted financial advisor, small business banking professional or use a reliable online reference such as IRD for peace of mind.
For information on how capability building programmes, workshops and advisory can help your business, click here.
For more business ownership and leadership advice, check out more of our blogs.
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