Why Should You Pay Yourself and How to Start?
by Kate McKenzie
As a business advisor, I have had the opportunity to work with over 400 businesses to help them grow and scale. While working with multiple business accelerator programs and at a financial institution, I observed that businesses that don’t pay themselves within the first two years are less likely to succeed long term. If you’re not convinced read on to learn about the many reasons why paying yourself will not only save you headaches but also set you up for success.
9 Reasons You Should Pay Yourself
1. Accurate Pricing
When businesses don’t pay themselves, especially when they are solopreneurs, their pricing for their products and services is often skewed. When you account for your time/labour you can better see the true cost of the goods or services you are creating. I’ve seen many businesses come to a realization that certain products they were creating simply took too many hours to produce and did not have enough of a profit margin to make it worthwhile once their time was being calculated into the cost of production.
2. Practice for Employees
As you grow your business you will reach a stage when you are ready to grow your team whether it’s by bringing on contractors, freelancers, part time or full time employees. When you set up your payroll for yourself and learn how to manage it as employee
number one you save yourself headaches down the road as your team grows. It’s much better to learn the ropes when it’s just yourself who is impacted than when it’s a whole team.
3. Time Management
When you start paying yourself hourly, it can often help motivate you to spend your time more effectively. Rather than finding your working hours interrupted with putting on laundry or making another cup of coffee or whatever other tasks you use to
procrastinate, hourly billing often helps you chunk your time into more focused work hours.
4. Valuing Yourself
If you were working for any other company, you would expect to be paid at regular intervals, you would not volunteer your time. When you don’t pay yourself you are sending yourself a message every day that your time is not valued. If you have team members you’re also projecting that message to them.
5. Risk Management
Placing yourself on payroll means that you have a history of paying yourself. When the global COVID pandemic hit many companies found they did not qualify for government support for themselves as they had never placed themselves on payroll.
6. Tax Benefits
Giving yourself a salary can have tax benefits for certain business entities, as it reduces your company’s profit. Talk to an accountant to find out what benefits your tax type.
7. Mental Health & Wellness
Not paying yourself leads to burnout – support your own health and wellness by ensuring that you (the most valuable asset your company has) is being paid appropriately. This will allow you to take time off to afford to do self care and to make sure that you remain resilient.
8. Access to Financing
When your company is starting out, financial institutions will be looking at your personal credit score and financial history rather than that of your business to determine your eligibility for business credit/loans. If you are paying yourself you are demonstrating
lower risk than by not paying yourself. You are also increasing your personal savings which will increase your chances of securing a loan.
9. Financial Security
Paying yourself provides financial security and allows you to have a plan in place for emergencies, making a transition to working in your business full time or adapting to changes in the economy through developing a savings strategy.
If you’re still feeling hesitant about paying yourself it may be linked to how you think about money. Oftentimes, how we experienced money or the lack of it as a child can carry over to us as business owners. To learn more and unlock some of your own personal hang-ups about money check out Lynne Twist’s book Soul of Money.
How to Start Paying Yourself
There are many ways to get started in paying yourself. Check out the following options to determine what method might work best for you.
Start by giving yourself at least minimum wage. Treat it as an experiment. You don’t have to spend it, you can even just put your wage allocations into a savings account each month but it will get you into the habit of setting that money aside for yourself.
Calculate your living expenses and determine how much you would like to be earning each month/year. Set a goal and work back from it to determine how you will reach it and where you might be able to increase your profit margins or add new products/services that will help you make your dream salary.
Do market research to determine what price point others in your industry are getting paid at. Use that research to help you determine an hourly wage. Start by jotting down how long it takes you to do different tasks and start applying your new hourly wage to each task. By the end of the week you will have a better sense of what you should be earning each week/month.
If you need help or want to learn more about how to pay yourself, one of my favourite books on this topic is Profit First by Mike Michalowicz. This book has great suggestions about how to start managing your cash flow, setting aside money for your salary as well as setting aside money for profit allocations.
One final note, as you start paying yourself make sure you keep a record of the money you pay yourself in your accounting software so that you can properly claim it when you file business taxes. Talk to an accountant if you’re unsure of how to categorize it in your accounting program.
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