Why your business should pay you first
By Peter Theuri | August 19th 2020
Paying yourself as you struggle to maintain cash flow and keep the store open sounds laughable to many. However, in the grand scheme of things, mastering that could be just what stands between your business failing and succeeding.
Why, you ask? Like other employees in a company who put in the time and effort, you should be assured of a salary. Receiving a salary keeps you motivated, and helps you avoid stealing from your business, says Philippe Bresson, a film producer and owner of Insignia productions.
He, however, adds that it should be a minimum pay in order to leave enough to develop and run the business.
There are other benefits to adopting the principle for your business.
1. It allows for self-development outside your business
Paying yourself and making good use of your salary may just save you one day. This could be useful in the case where a business owner needs a loan to develop projects that might not be attached to the business.
It also means that in case of personal emergencies, one does not have to keep on reaching into the business coffers to pluck out savings. Growing one’s personal savings makes them independent from the business in such a way that personal drawbacks can be dealt with without impacting the health of a business.
2. Looks good to investors as well as banks and other finance companies
Your willingness to invest in yourself demonstrates a high level of commitment and confidence in the health of your business. This means that the owner runs a business that is capable of paying out salaries, and it indicates that the business is healthy.
Investors will want to pump their money in a business that is sure to honour its obligation to its employees without a whimper. Nothing proves that more than a salaried business owner.
3. Tax benefits
A business owner may also enjoy a host of tax benefits from paying himself, depending on how the business is set up. Governments’ tax departments are used to people being paid a regular salary.
By giving oneself a regular salary, you will be seen as just another salary earner and be more likely to be exempt from charges that may be levied on you. This is a good way to be viewed as a tax compliant employee, putting your business away from the line of fire.
4. Need to pump extra cash into business
Any growing business will always be cash-hungry. As it grows, one may need to move it to larger premises or invest in new staff or machinery to grow its capacity and portfolio. Even if you can keep a lid on your fixed expenses, your business may require an increase in variable inputs.
In that respect, whatever the growth plans, one always needs adequate money in reserve to fund them.
Sometimes, when a business is not going through a very successful period, one may need to finance overheads from their own pockets. This can only be possible if they have been making savings in their personal accounts.
But if a business person keeps ‘raiding the till’ whenever short of cash, they will never know how much cash they have in reserve, or when they have adequate funds to initiate the next stage in their growth plans. This may stunt the business.
5. You will more easily qualify for mortgages and other loans from banks
When assessing a person’s ability to service a potential loan, banks prefer wage and salary earners to sporadically earning self-employed business owners.
Banks want to know that a borrower can comfortably service the loan each month, and by paying yourself a regular salary, one will have the pay slips and bank statements to show a steady cash flow history.
6. Much of the money in the business’ bank account is accounted for
It is easy to think all the money sitting in a business’ bank account is the proprietor’s. However, the money actually belongs to the business — not you personally — and is needed to cover things such as salaries, paying contractors and suppliers, stock purchases, rent and future tax payments.
It does not matter how profitable a business is. If the money is not there to pay the bills when they are due, the business is at risk of becoming insolvent; a situation where one has more commitments and bills to pay than cash or available funding to pay them with.
Having sufficient cash flow is vital for any business. It is far easier to manage cash flow when one has predictable expenses they can plan around — including a salary.
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