As a business owner, one of the most unexpected and challenging dilemmas is when to pay yourself (and in some cases, if you should pay yourself at all). It sounds like a no-brainer, right? After all, everyone needs to get paid.
But to savvy entrepreneurs who want to grow their company and see long-term success, they can feel an immense amount of pressure to reinvest every dollar earned back into the business.
So how do you make a wise decision?
Despite worries or concerns about prioritizing your own payment, it’s actually beneficial to your business if you pay yourself first.
Here are five tips to help you rest easy, pay yourself at the right time and grow your business:
1. Yoga for business owners
What do your income and yoga have in common? They are both excellent ways to reduce stress and enhance your quality of life. Paying yourself first creates a future safety net in the event that any surprises or unexpected personal expenses emerge — not to mention the peace of mind it instills. Additionally, receiving a payment, even if small, can be a huge incentive for a business owner — providing motivation when times get tough. And another often overlooked benefit of paying yourself? It demonstrates to lenders, investors and finance companies that your business is serious, stable and committed.
2. Stay mindful of your expenses
Whether you pay yourself first or last, you should set up a compensation plan in advance that will cover your expenses. Some business owners pay themselves a modest payment schedule to get by, while others will take a higher salary to live their dream life. Either option is fine as long as the numbers make sense for your business finances and goals. Don’t forget to use a cash flow budget as a starting point to determine how much money can be diverted from your business to your bank account.
3. Build wisdom by knowing your market value
As your business evolves, you’ll have to readjust budgets for new expenses and income — and that could also change your potential personal take-home rate. It’s helpful to keep an eye on the comparable fair market salary for your position to see where you’d stack up if you were to pay yourself as an employee. Of course, business owners often bring a lot of experience, wear multiple hats, and could be taking on two or three jobs worth of work — so use this just as a general guide.
4. Meditate (with your accountant)
Once you’ve decided that your budget can accommodate your payment, it’s time to figure out how to structure things. Two of the most common payment methods for small business owners are a salary, where a set amount is paid every month and taxes are withheld, and a draw, which is essentially a ‘commission’ on the profits of the business. Each payment method has benefits and drawbacks, and an experienced accountant can help you to decide which is best for your business. They can also discuss tax implications for both the personal and business side of the coin.
5. Become enlightened by overcoming payroll challenges
What happens when your clients pay their invoice late or there’s an unexpected delay? It can be tempting to sacrifice your own payment first and shift your business capital around. But one helpful way to avoid this scenario is by having a predictable and consistent cash flow — regardless of when or how payments are invoiced and received. Alternative funding tools such as factoring will enable you to sell your invoices, collect earlier and gain that much-needed cash flow predictability.
Factoring is often easier to access when compared to traditional bank loans and it offers a lot of flexibility that’s near impossible in many other financial arrangements. For example, use factoring only for the months you need it, rather than committing to a multiple-year repayment plan that will remain long after the cash flow crunch has passed.
Making the leap to paying yourself first can seem daunting or stress-inducing, but it doesn’t have to be. All it takes is a bit of planning, budgeting and help from your trusted business partners to gain that extra bit of zen in your business.
For entrepreneurs that are in search of other useful ideas to gain some business zen, learn about the relationship between success and business failures or how to improve your customer satisfaction.