You know you need to pay yourself.
And you’ve even been told how: ask your accountant, don’t take out more than you need, be consistent yet flexible, use last year’s performance as a benchmark, and anticipate your gross profit for the next 3, 6, 9, and 12 months.
All great tips. But knowing when it’s time to pay yourself can be tricky, especially when you’re a creative entrepreneur with an inconsistent income.
Not sure it’s time to compensate your business’s top performer (that’s you!)?
Here are a few signs you’re ready.
1. When you no longer “just make ends meet”
You can pay yourself when you meet all your financial obligations for at least six months and have the cash to spare. That might mean something different for each business, but in general, it’s after paying your taxes, expenses, health care, and retirement plan.
2. When it’s time to expand your business
Before you expand your business or seek a venture capitalist, your books need to show a record of success and good financial health.
Even if your gross profit looks impressive, how your company is operating as a whole (the net profit) also reveals critical information. You want a comfortable medium — pay yourself enough to show your business is sustainable, but not too much to make investors wonder if you’re in it for the wrong reasons.
As a heads up, you may be surprised to find your business isn’t as profitable as you thought once you add a new salary to your expenses.
3. When everyone else is getting paid
You’re a valuable, boots-on-the-ground, employee. But, you’re also the person who has to take one for the team. So, until you pay your employees and vendors on time, you can’t pay yourself.
4. When it supports your brand
What’s your mission? How about your vision? Is it to build something new, make an impact, or just collect a paycheck?
From a financial standpoint, it’s important to pay yourself. But, how much you write on the check (and when) will be contingent on whether it fits your brand and future goals.
5. When it makes your accountant happy
It depends on how your business is incorporated, but taking a salary can lower your tax obligation. That’s why we recommend consulting with your accountant first. You may find that paying yourself more means paying the IRS less.
There’s no one magic answer to knowing when it’s time to pay yourself. The process will be a financial and personal exploration. However, the key points are: talk with your accountant about the tax advantages, consider the vision you have for your business, and calculate your net and gross profit.
What are some other signs it’s time to pay yourself? Would you add anything else to this list?