Are you paying yourself enough?

Are you paying yourself enough?

Are you paying yourself enough?

New businesses have boomed since the pandemic. Australians are keen to control their lifestyles and schedules and live out their passions. Business ownership goes hand in hand with flexibility, along with the responsibilities of a business owner. As a business owner you can control your working hours and therefore your earnings. However, many business owners don’t realise that they are underpaying themselves.

According to business coach Suz Chadwick, 45% of the small business owners fail to pay themselves enough. It can be hard to work out what your pay should be, especially if your business earnings fluctuate monthly. 

Reasons business owners may underpay themselves:

  1. Many business owners are conscious of the financial pressures COVID 19 created. Even though 74% of the owners Suz surveyed consider that they oversee a profitable business. 
  2. If cash flow is tight, many business owners pay their bills first, before themselves. 
  • Business owners may fail to pay themselves because of fluctuating or seasonal cash flow, and are unsure what the business can afford.
  • Finally, it may be simply that they want to reinvest in the business to help drive its growth.

Anne Nalder, founder and CEO of the Small Business Association of Australia, says SME owners generally don’t pay themselves a market salary and this is not usually because they can’t afford it, it is more about business uncertainty and flexibility. 

Nalder explained that some owners take drawings from their business rather than reporting a wage. Particularly since the pandemic, there is generally a lot of uncertainty when it comes to running a small business. Small business is doing it particularly tough in lockdown locations and small businesses in each state are being run differently to each other.  

Unfortunately, your overall business worth can be affected when an owner isn’t paying themselves enough. 

Business adviser Craig West, CEO of Succession Plus says  “If you are not paying yourself a market salary, then a buyer will expect this money to be added back when they determine what your business is realistically worth. In many cases, businesses that look profitable but rely on the owner and often their family as free labour are not profitable at all.” 

According to West, if an owner is not able to pay themselves a market salary, there may be a cash flow issue that needs to be addressed. Using accounting software and professional advice to predict and manage cash flow can help. 

Accounting software giant Xero have released a module to help businesses see their forward cash flow. The new system can estimate your bank balance 30 days into the future, by taking all the relevant data from your bank account, bills and invoices. The tool can also show you the impact of existing bills and invoices if you pay them on time. 

Need help with your small business finances in Perth? Aspect Accountants and Advisors have over 15 years’ experience managing small business accounting.

Give us a call for a FREE initial consult to discuss your accounting needs.