How Much Can I Pay Myself?
Business owners are facing tough decisions in the current climate. Caught between retaining staff and keeping a business viable, there’s also the question of how much you can actually pay yourself.
It’s no secret that a CEO that pays themselves before they pay their employees can badly affect morale. And it’s a particularly pertinent point to bear in mind as job support schemes wind down and redundancies appear on the horizon.
In businesses severely impacted by the coronavirus pandemic, many CEOs are sacrificing their own salaries to keep their companies afloat. However, the ramifications of this can be major, putting your own personal finances under pressure and leading to a considerable degree of stress. This stress can in turn lead to bad business decision making. So, it’s a catch-22: you need to make money to live, but your business needs cash to survive.
Want to know how to work out how much you can afford to pay yourself? Read on to find out our recommended approach.
Setting your salary
Even pre-pandemic, the question of how much to pay yourself as a business owner has always been a difficult one. Setting your own salary requires a detailed look at a number of factors, including business profit and what can be considered ‘reasonable compensation’ for your role based on the market sector, company size and turnover.
How your company is set up will impact how you can pay yourself too. For example, if you’re set up as a sole trader, you can be flexible with what and when you pay yourself. Or if you’re an incorporated company, taking regular payments and being on the company payroll is often the most sensible approach, as taking big lump sums can raise questions with the tax office. Many company directors take a salary from dividend payments from company profits to be more tax efficient, after discussions with their accountants.
However, if your business isn’t actually generating any profit (or very little) – a position many businesses are finding themselves in as a result of the pandemic – you may be tempted to cut your salary completely.
Something to bear in mind is that as a business owner, you may be eligible for government support. For example, in the UK some company directors are eligible for support through the Coronavirus Job Retention Scheme provided they are paid through PAYE.
Whether your business is making some profit or you are receiving financial support in the form of a grant or loan, the only way you can truly know if you can pay yourself, and how much, is to have a detailed view of your cash flow.
Using cash flow forecasting to work out your pay
Understanding what cash is coming in and going out of your business will give you a clearer picture of what’s left after you’ve paid all your expenses.
To pay yourself a regular salary, you’ll want to budget this into your forecast. By including your salary in your forecast you can work out where else you need to get more money in or cut spending to ensure you have an income you can live on. Base your numbers on the minimum revenue you’re likely to bring home over the next few months and work from there.
Here’s how to do that super easily in Float:
To make it work you may need to adjust the pricing of your goods or services, or you could look for external funding to help you through a difficult period.
Get our top tips on how to forecast your cash to make better decisions for your business.
Free Download! The Ultimate Guide to Cash Flow Forecasting
Marketing agency Managing Director, Neil Edwards from The Marketing Eye told us: “Before adopting Float, we used spreadsheets, and I wince now at the amount of time we spent trying to update a spreadsheet before we could be comfortable with it.
“We have always monitored cash flow because it is crucial to running our business. We had used Float for about 18 months… and having the ability to model different scenarios relatively quickly was invaluable. This forced us to be honest with ourselves and not allow over-optimism to get in the way of our decision making.”
With a clear picture of your cash flow, you’ll have a better idea of how much you can afford to pay yourself and continue to keep your business cash flow healthy. Start your 14-day free trial of Float today, no credit card required, and NO MORE spreadsheets!
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