How much should small business owners pay themselves?

08/07/2021 10:40 AM By Samantha Dargie

Building a successful business typically requires all the money you can throw at it – and then some. Which means it’s easy to pay yourself last, or not at all. But this isn’t sustainable. So it’s important to build your business plan to accommodate a wage for the business owner.

How much you pay yourself will depend on your business strategy. Steve Greene, a business coach at Pravar Group, says the strategy and your pay will depend on whether you plan to grow, stay where you or contract.

“If you’re in a growth phase, you need to consider whether working capital should be kept within the business to support its growth or whether it can be funded from profit and cash flow,” he says.

Green says owners’ salaries also need to be set according to the business’s ability to meet its regulatory payments such as PAYG and payroll tax and superannuation, in addition to its other necessary expenses. 

“Necessary being the operative word, here, as the majority of businesses will carry some unnecessary fixed expenses or poorly controlled direct costs. These eat into profit and may inhibit the firm’s ability to sufficiently remunerate the owner,” he adds.

“Your pricing strategy should also accommodate the ongoing costs of being in business”

Cash flow is a major determining factor as to how much and how frequently you pay yourself. The business may be profitable but if payment terms are unfavourable, it may not receive cash from sales for 30, 60, 90 days or longer. 

Says Green: “This can make it hard for the owner to receive a salary. So negotiate payment terms with clients to preserve cash flow so the business can meet its outgoings and still pay the principal.

”Factor your pay into how you price your products and services. Your pricing strategy should also accommodate the ongoing costs of being in business, such as insurance, registration and licensing fees, marketing, rent, telephone and utilities.

When it comes to insurance, now’s the time to review all the firm’s policies, including general liability and cyber insurance, as well as the principals’ life insurance cover. A rule of thumb is to insure everything the business requires to continue to trade. This means business interruption insurance along with sufficient cover so plant and equipment, buildings and contents, raw materials and inventory are properly protected. 

Arriving at a number

Devise a personal budget covering all your personal and home expenses when figuring out the salary the business should be able to meet. “Assess whether after deducting all other fixed expenses from gross profit, you can still afford to pay yourself a salary that covers your personal budget,” says Green. 

What to do if you can't pay yourself

If you really can’t afford to pay yourself, you need to take steps to put the business in a position so it can.  “Work out how much more revenue and profit your business needs to generate to pay you what you need.

Then, reduce expenses and the cost of business and production without scrimping on the quality of your product or service. Also look at how you can cut your household budget to align with what the business can afford to pay you,” says Wealth Forum financial planner Sheila Cabacungan.  

If this is still not enough to cover a living wage, set yourself a timeframe for building your customer base to get to a point at which you can pay yourself. Be prepared to raise your prices or find clients who will pay you what you’re worth during this process. 

Says Cabacungan: “While you may have started your business for every other reason besides money, you need to earn a living. Otherwise your business should really be a hobby or a charity.”

Important note - the information provided here is general advice only and has been prepared without taking in account your objectives, financial situation or needs.

Samantha Dargie