The beginning of the month is a gratifying period as the employees get their salaries credited to their accounts. However, it is filled with the dilemma of whether to pay yourself or not for the owner. Although Mark Zuckerberg, the Co-Founder and CEO of Facebook, takes home an annual salary of US $1, most entrepreneurs cannot live off that kind of money.
The reason is that he is already super-rich and owns 17% stock in his company which takes his net worth to US $67.3 billion. Small business owners in New Zealand are not sure about paying themselves as they do not want to disrupt the budget of their company.
If you are an entrepreneur or are planning to acquire a business for sale in New Zealand, then you need to know the answer to this pertinent question - ‘how much should you pay yourself?’ Let us help you in getting to a logical conclusion of this puzzling mystery.
The Importance Of An Entrepreneur’s Salary
The initial days of a start-up may not allow the entrepreneur to draw a salary as you are investing capital in equipment, supplies, stock, marketing and need to manage the cash flow. However, when the business starts growing, you need to pay yourself.
It is crucial for determining the budget. If you don’t deduct your salary from the available funds, you won’t get the accurate picture of the bottom-line and the financial health of the business. Your salary is an expense that needs to be deducted to make significant financial decisions, such as increasing the marketing budget or investing in new equipment.
Also, if you are not earning from the business, you will end up exhausting your personal assets and put your family life in jeopardy. So make sure that you get a salary like all other employees.
How To Start The Process?
Entrepreneurs usually depend on profits and mathematical formulas or decide a fixed figure for their salary. However, it should not be based on guesswork and must consider a lot of factors, such as the net profits, the projected turnover, operating expenses, taxes, debts and savings. You must have separate personal and business accounts and must pay yourself regularly by adding yourself in the payroll management system. You can get accounting software with payroll feature to make things easy.
It will help you during audits and tax time as everything will be organised and transparent. You can start with a small amount which is enough to manage monthly expenses and then increase it annually as your venture grows with the help of an expansion plan.
What Is The Ideal Salary For An Entrepreneur?
Most business veterans talk about reasonable compensation for entrepreneurs, but the amount is also heavily dependent on the development stage of the business. A fair amount would be the one that suffices your personal needs and allows you to make small savings while keeping the inflation and market trends in mind. You should not underpay yourself either as it can have an adverse impact on your business as well as personal finances.
If you are undergoing a financial crunch at home and are stressed about your monetary conditions, you won’t be able to perform to the best of your ability as an entrepreneur. So make arrangements in the budget to draw an amount that allows a comfortable living and is comparable to the remuneration of other similar business owners by analysing the income statistics. Also, the salary should be in tandem with the workload and the working hours so that you are not exploiting yourself unnecessarily.
The salary of the owner is also dependent on the business structure. For example, a sole trader can take any amount at any time from the funds as the business is not a separate legal entity, and he is the only owner and controller. In other business types, the owner has to be on the payroll and get a regular salary like other employees.
How To Calculate The Entrepreneur Salary?
There are a few methods which can help you decide the figure.
1. Payment That Covers Personal Expenses – For this method, you will have to calculate all the living costs, including utility bills, dinner outings with family, personal loans, and college funds for children. Add up all your expenses and come down to a bare minimum amount that will cover them comfortably. This is ideal when you are not making much profit and are still trying to reach break-even.
2. Using Online Tools – There are specific tools which allow you to compare your salary with other entrepreneurs running similar businesses, such as the Payscale. These allow you to pay yourself according to the industry standards. Your accountant can also help you in making this decision.
3. Percentage of Profits Method – There are several business owners who take a defined percentage of the profits as salary. You can also go the same way and take home a decent amount.
4. Take Your Cut First – Another school of thought propagates that as the owner of the business, you are responsible for keeping it running and for that, you need to first compensate yourself. It simply means that the entrepreneur gets paid before deducting every other expense from the profit.
5. Tax Saving Tactics – To save taxes, you can take a minimum salary and get the rest as dividend payments as they fall in a lower tax bracket. You can also get paid in the form of stocks and shares of the business.
6. Get Paid Later – In some cases where the entrepreneur is financially sound and doesn’t require a regular salary, he/she can create a business agreement to get paid at a later stage. However, you must record this amount as a liability in your financial reports.
Be Aware Of Deductions And Investments
The expenses that can be claimed are deducted from the total profit before calculating tax. Thus higher claims mean lower taxes. You can claim the 100% cost of a variety of business expenses that are used for only business purposes. You must also understand that drawing a salary will incur taxes while investing the money back into the business will not.
This money can be utilised for the growth of the business, and you can pay yourself at a later stage. The financial condition of the business is the best measuring tool to decide your salary. If the company is in loss or under heavy debt, you should not be taking home a hefty pay packet. On the other hand, if the profits are increasing every year, you can continue adding a few zeros to your salary.
Every organisation is unique and has its own set of requirements and constraints. As an entrepreneur, you must decide the best method for calculating your pay. If you are planning to purchase a business for sale in New Zealand, then you can take a call on the basis of the financial well-being of the set-up, its growth stage and your personal needs.