Monday 29th of June 2015
Aspiring entrepreneurs visualise enjoying a net worth of millions and travelling in private jets
...even before starting up. However, these things do...
Aspiring entrepreneurs visualise enjoying a net worth of millions and travelling in private jets even before starting up. However, these things do not come easy. Unless you are born with a silver spoon in your mouth, you will have to wait to make a fortune from your pay check.
Small business owners dealing with debts and new challenges constantly worry about managing their finances. It leaves them puzzled about paying themselves a salary. Many forgo their dues to boost the financial health of their entity and get a return on investment only when they exit. However, this is the wrong approach.
Whether you have a start-up or have acquired a business for sale in New Zealand, taking a salary is necessary for your financial progress and managing taxes. It is essential to pay yourself for the hard work and effort you are putting in every day to make the business a success. The next step is deciding the amount that should be fixed as a monthly salary. Let us help you determine how much you should pay yourself.
How to Decide Your Salary as an Entrepreneur?
When running a small business in New Zealand, you are more concerned about maintaining a positive cash flow. Thus, most entrepreneurs put back the surplus cash into the business to make it grow instead of taking a salary. Several others use the income to hire talented team members and pay them a significant amount. It can backfire by affecting your personal wealth and making you frustrated about not making enough money.
Conversely, some entrepreneurs have successful businesses and thus prefer taking home a hefty pay check to enjoy a luxurious lifestyle. They keep increasing the amount as the business expands. However, even this type of payment is not recommended by experts. A business owner should be paid according to the market rate and take an annual increment like other employees. Here are the steps to set your salary as an entrepreneur.
The first thing that your bookkeeper will tell you to do as an entrepreneur is to open a separate business account. It will help you to differentiate between your wealth and the business capital. The bookkeeper can track the incoming and outgoing without ambiguity with a separate account. It ensures that all of the business transactions are noticed and recorded accurately. Thus, when you take a salary, it will become a part of the expenses and get recorded in the books without any confusion. The fixed salary allows the bookkeeper to calculate expenses and effectively forecast cash flow.
There is no standardised amount for an entrepreneur's salary. It should depend on the income and expenses of the business. To pay yourself, you must first check whether the business can bear its expenses. Taking a reasonable salary makes sense, and it can be ascertained by identifying the trends in the market for the average salary of entrepreneurs.
So, determine the business's net income by deducting total expenses from the gross revenue. After you know the income, you need to identify the amount set aside for business taxes. Your bookkeeper can help with this information. The next step is to deduct the debt payments from the remaining amount after subtracting taxes.
After all the outgoings are taken out of the income, you must put some amount into the cash reserves. It is crucial to create business savings for unexpected expenses and investments. So, the amount left after deducting the monthly savings can be used to take a salary.
There are two ways of determining the entrepreneur’s salary – a percentage of profits and personal expenses. The profit distribution method sets a fixed percentage of the business profits as the salary of the entrepreneur. Usually, it is 50% of the profits. However, if the business is still growing and is in the initial stages of the business lifecycle, the salary should be based on personal needs.
To arrive at the salary amount, the entrepreneur should identify his fixed and variable expenses, including the add-ons of shopping and dining out. As a business owner, you need to check how much money is required to satisfy these monthly needs comfortably and then decide the amount.
Although the two methods can help decide the amount, you must consider a few factors. If the capital available with the business is lower than the personal expenses amount of the entrepreneur, you will have to improve profits and lower expenses to make it match. Your bookkeeper can help implement cost-cutting measures to increase the amount the owner can access.
Also, ensure that the cash flow is positive and the business has sufficient funds to pay for all the expenses and salaries of the employees. If you are expanding and want to invest the income back into the business, you must think about the personal needs. If you can maintain your lifestyle on your spouse’s salary, you can follow the lean policy and take home a minimum amount. It can be increased once the business has expanded and is performing well.
The business owner should be aware of the financial health of the business at all times. They should not continue to take home a significant amount when the business is not making sufficient profits. The idea is to avoid burdening the business with extra expenses because of your fat pay check.
You can grow your personal wealth as the company expands. Thus, discuss your salary amount with the bookkeeper after every few months and keep it connected to the revenue and cash flow of the business. If you have recently acquired a business for sale in New Zealand, it is critical to ask your accountant to help with the salary amount. They will assess the future costs and income and help with the salary.
Conclusion
The amount of the entrepreneur’s salary depends on the health and stage of the business. Paying yourself is crucial to maintain your personal expenses and focusing on business goals. Also, it builds the confidence of the investors and employees in your commitment towards the entity.
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