Four reasons why you should consider paying yourself a wage

The cash in your company’s coffers isn’t just for you, so why treat it that way? Here are four reasons to bring back the pay slip.

Before you had your own business, you probably worked for a company who paid you a regular wage.

You may recall there were distinct downsides to this.

You only ever received the same amount, regardless of how hard you worked, and at the end of the month you would sometimes eat baked beans on toast to tide you over to the next pay cheque.

Now that you own your business, the temptation can be to throw out all these old habits, and treat the business account like your own ATM.

Why shouldn’t you, you’ve worked hard – isn’t it your profit?

Well, there are many advantages to paying yourself a wage, as well as many risks if you choose not to. We cover these below.

1. It’ll improve your credit rating

Thinking about getting a new house or car? Banks and other credit providers want to see you have a steady job with a steady wage, so they know when they loan you money you’ll be able to pay it back.

If you have pay slips and bank statements to show you are receiving a regular income, it will be much easier for a lender to determine you’re a consistent earner and thus a safe bet

2. You’ll be safer come tax time

When you take money out of your business for your personal use, it falls under one of three categories: wages, drawings or a loan from the business, or dividends.

All these payments need to be properly accounted for, and all are liable for tax.

If you don’t have an organised way to account for your withdrawals, you could find yourself staring down at an unexpected personal tax debt when Mr Tax Man comes knocking.

3. It’s better for your business

We all know that businesses need cash, particularly when they’re growing. Having cash means you can pay your expenses on time, invest in new staff or materials, and – most importantly – avoid operating while insolvent.

However, if you keep raiding the business kitty until the cash runs low, you’ll miss the opportunity to spend that cash strategically in your business.

And a missed opportunity to grow your business is a missed opportunity to grow your profits.

4. It’s easier to plan

Back when you had a regular salary you knew exactly what you had week by week. In turn, you could set aside money for savings, your mortgage or daily expenses.

Without this predictability, it’s difficult to be as disciplined, and you may find yourself making less ambitious personal financial goals and taking a lot longer to reach them.

Ok, I want a wage, now what?

The next step is to strike a balance between what the business can afford and how much you need to live.

How can you work this out? Come in and have a chat. We can give you targeted information for your unique circumstances, and help you set up a salary system that works for you.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without the prior written consent of Finance Matters, which is where this article also appeared.

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