How much can your business pay you?
How do you know how much you can pay yourself from your business? Although it may be tempting to guess at this figure it’s far better to take a little bit of time now to go through your numbers and save yourself headaches in the future.
To work this number out we need to look at six key pieces of information, so you have a clear view of your income and expenses, for both business and personal life.
1. Your minimum personal budget
You’ll need a personal budget that shows the minimum expenses you have to pay in order to live. In this budget you’ll include rent or mortgage payments, groceries, power, internet etc but don’t include any additional luxuries at this stage.
2. Other household income
Next you need to know what, if any, income will come from sources other than your business. If you’re also working for someone else then include your wages, or if your partner is working include their wages, as well as any interest, dividend or net rental income that may be coming in.
3. What is the gap?
Now that you know what your household income and expenses are you’ll be able to work out the gap between your personal income and expenses that you’ll need to fill from your business income. This will vary from 0% right up to 100% depending on who earns income within your household.
4. Minimum business budget
Find the numbers in your business budget that show the minimum expenses that need to be paid to keep your business running.
If you don’t yet have a business budget then read “6 steps to easily create your business budget” . That blog post will step you through how to create the budget you need.
5. Your business growth plans
The next step is to consider the plans you have for your business over the next 12 months. Will you need to set aside funds to pay for more advertising, develop your internal processes or hire a new staff member?
Work out the amounts you’ll need for those additional expenses.
6. Tax obligations
The last step key piece of information that you need is the amount you have to set aside for your business AND your personal tax obligations. This is often a step that is overlooked by business owners when they’re working out how much to pay themselves. You never want to be in the situation where you’re having to take money out of your savings in order to pay your tax, so make sure you don’t skip this step.
Now that you have all of those numbers, you’ll be able to work out how much money your business can pay you. Then you can move onto deciding how to use that money.
There are three areas where you can use those payments:
1. Luxury upgrades to your personal budget
These are the kind of upgrades that you’ll buy immediately e.g. a new suit.
2. Short-term savings
Your short-term savings will include items like a family holiday or a new sofa.
3. Long-term savings
Your long-term savings could be contributions to your superannuation or to other investments. I often see business owners viewing their superannuation as an expense rather than a long-term investment. I also see many people not including contributions to their super in any of their budgets.
There are tax implications in relation to your superannuation contributions so it’s important to come and talk through your options before you commit your funds so you know that you’ve got the right set up for your situation.
The amount that your business can pay you needs to be worked out carefully, as well as where those amounts will go once they’re in your hands. The proportion of payments that you allocate to luxury upgrades, short-term investments and long-term investments are strategic decisions that need to be carefully thought through as there are many different options available.
If you want specific advice on working out how much your business can pay you and what are the best options for you, book a 20-minute call with me to discuss how I can provide that support for you. Book your call BELOW.