Back before you were a business owner and you held down a regular job, with a wage, that wage would land in your bank account every payday, and then you’d do your best not to spend it all before the next one was due. If you did run out of money, the only way to get more was to ask friends or family members. Those days are long gone now that you’re a business owner. No regular wage payments are needed because you can just use the money sitting in your business’ bank account. After all, it’s your business. And that means the money’s yours, right?
Actually, the money belongs to the business, not you. In fact, chances are it’s already earmarked for wages, rent or equipment. And that’s just one of seven reasons why you should stop dipping into the business account and pay yourself a regular wage instead.
Here are Propel Business Groups’ 7 reasons you should stop treating your business like an ATM:
- Most of the money in the business’ bank account is already spoken for to cover items such as:
- Paying contractors and suppliers
- Stock purchases
- Rent and utilities
- Future tax payments
It needs to stay there so you can pay the bills when they’re due. If you can’t, your business is as risk of becoming insolvent—no matter how profitable it is. Reliable cash flow is a vital part of any business and it’s far easier to manage cash flow when you have predictable expenses you can plan around—including your salary.
- You need money to grow your business.
To grow your business you may need to move to a larger premises, or invest in new staff or technology. And to do that, you’ll need cash, on top of the money you already need to keep the business running. To build up your cash reserves you need to know exactly how much cash is flowing in and out of the business, but if you keep raiding the till whenever you’re short of cash you’ll never know what cash you have in reserve, and whether you can afford to go ahead with your plans.
- Wages are what you’re used to.
Chances are you’ve worked for someone else at some point in your life. And that means you learned how to budget for your income and expenses, manage your money, and save up for a mortgage or investment—all on a regular wage. Why change now?
- You’ll avoid overspending.
We often spend to our income. The more there is, the more extravagant our lifestyles become. If your business has a profitable week, and its bank balance goes up accordingly, you might think it’s a chance to indulge on dinner at a fancy restaurant, a weekend away, or some new gadget you’ve always wanted. And that’s fine—as long as you treat it as a bonus in accordance with your business’ planned and documented salary and remuneration packages. If you keep doing it every time there’s extra money coming in, you’ll start thinking of it as part of your standard income. It will effectively become your new baseline, and you’ll create a lifestyle that demands that kind of salary every week, whether or not the business has had a similarly profitable week. That is not good for the health of your business.
- You’ll avoid scrutiny from the taxman.
The ATO is use to people getting a regular wage. If they see you as just another person getting paid a regular wage, they are unlikely to give you a second glance. If you start withdrawing large amounts from your business’ bank account whenever you feel like it, it may well get their attention.
- You could be creating a tax liability for your business.
As an employee, your boss has to set aside a portion of your pay as tax, which they periodically pay to the government on your behalf. Despite what you might think, the money you withdraw from your business’ bank account isn’t tax-free. Depending on your business structure, it needs to be properly accounted for as:
- Wages to Dividends
- drawings or a loan from the business
- dividends (a portion of your profit)
By raiding the till whenever you’re short of cash, you could be creating a potential debt that will need to be paid at some point. And that debt could lead to severe cash flow problems down the track, especially when you try to sell the business.
- You’ll improve your chances of getting a loan.
When you apply for a loan, one of the first things the banks will check is whether you’ll be able to make the monthly loan payments. To prove that, you’ll need to show you not only earn enough money to make those payments, but also earn it consistently. This means supplying pay slips and/or bank statements showing regular amounts going into your bank account – hence the need for a regular wage.
Don’t make life hard for yourself by showing the banks sporadic and inconsistent payments to your bank account, just ask yourself, how much should I actually pay myself?
Enough to cover your basic living and lifestyle requirements. (It’s hard to make sound business decisions when you’re stressing about how you’ll pay the power bill.)
You also need to make sure your business has enough cash to operate. Even if there’s plenty of cash in reserve, there may be more tax-effective ways to receive income from your business, such as dividends.
Important note: There’s no specific answer to this question. The situation will be different for every business and its owner, and so it’s vital that you get personalised advice from professionals like us at Propel Business Group.
If this all seems overwhelming, don’t worry. Call us today and we’ll look at you and your business’s current position and offer advice. We’ll also set up payroll systems that automatically create and distribute the tax-related paperwork needed for each pay period.
It’s great being your own boss, it’s even better when you have a regular salary.