Starting your own business often requires a big leap of faith. Is your business robust enough to go full-time? Will people want to buy your goods or services? How long will it take to become profitable? While there are many unknowns, one thing is certain – you should always pay yourself a salary.
Rewarding your business effort
Paying yourself a salary is an important way of showing value for your work. It’s unlikely that you would work for anyone else for free, so why undervalue your contribution to your own business?
“There are two aspects to a running a business,” says Gavin Waring, founder and CEO of Your Business Angels, which provides advice and support to Australian small businesses. “It should be profitable as soon as possible and it must also reflect a reward.”
Waring says that resources are more important than money when it comes to starting an e-commerce business, but he suggests you should have enough cash to pay yourself a salary for six months. “You need to work out what you’re going to sell and have access to the product that you’re going to sell,” he says. “If you’re going to focus on your business, you must be able to feed yourself and pay the rent or mortgage and living costs. When you start a business, you usually do it on the smell of a oily rag, but you do need money.”
How much is enough money for a new e-commerce business?
A 2014 survey from data collection and benchmarking group Compass shows that Australian start-up founders aged 21 to 30 pay themselves an average of US$54,333 a year, while the global average is US$36,873. Australian founders aged 31 to 40 pay themselves an average of US$55,183 a year, slightly more than the global average of US$50,777. Those aged 41 to 50 are more generous, paying themselves an average of US$112,500 a year, which is almost twice the global average of US$60,456.
Your salary may come down to experience and confidence. The Compass survey showed that Australian founders working in their first start-up were paid an average of US$48,117 a year, while those with one previous start-up behind them were paid an average of US$88,904.
The amount you choose to pay yourself depends on how much your business can afford after you account for fixed costs and overheads. It also depends on your personal budget, lifestyle and financial commitments. “You might process a salary that’s not far off the tax-free threshold but you should still continue to process a salary so you are recording your effort,” says Waring.
Process a salary now, pay it later
Waring says your business is robust enough to go full-time when it makes enough money to pay you a salary.
If you want to keep more cash in your business, consider processing your salary now and paying yourself when you become more confident in your cash flow.
“You can process a salary for yourself but not necessarily take it,” he adds. “You can leave it within the business as a debt to yourself. You might process a salary of $800 but only take $300, because that’s what you can live off.”
Pay yourself a wage – don’t draw money
If your business is structured as a company, it is important to process a salary rather than draw the money from your business. “If you pay yourself a salary and you process it through your accounts, it’s a legitimate payment the business makes,” explains Waring. “If you draw money from your business and your business fails and you have to liquidate a company, this means you owe the money back. You become a debtor. Even if you pay yourself the base wage, process it as a salary and never take drawings.”