“When starting a business, the temptation is to pay for your business’ expenses using your personal current account.
“This blurs the lines of what you are spending in your business and the larger expense burden leads to a business owner worsening their personal financial credit records or placing it in jeopardy,” Ethel Nyembe, head of small enterprise at Standard advises business owners.
“Pay yourself a salary into your personal current account and use this for your personal living expenses,” she adds.
Four entrepreneurs share with SME South Africa how they pay themselves a salary while still investing in their businesses. They are:
- Chris Bruchhausen and Gareth Price, founders of Investmint, a platform that connects South African businesses looking for funding in the form of a loan with investors who are looking for alternative investment opportunities.
- Jodi Lynn Karpes, solopreneur and founder of Green Queen Communications, a public relations company.
- Lisa Linfield, founder and CEO of a wealth and investment management business, Southern Pride Wealth.
Here are hacks to help you figure out how to pay yourself a salary:
Chris Bruchhausen and Gareth Price – “Prioritise covering your business’ needs”
1. Meet your business’ financial needs first
We determine what our monthly expenses would be and then prioritise covering those first, after which we can then consider the amount that can be paid out in salaries based on the remaining available free cash flow.
2. Remember income tax
It is important to also remember that you will have to pay tax on any salary that you declare to yourself, so if you decide to declare inappropriately high salaries to yourself in the early stages of your business you will find yourself saddled with a large employee tax bill at the end of each month which could put further financial strain on your business.
3. Pay yourself
Pay yourself enough to meet your personal obligations as there is no point ruining your own financial situation because that will end up impacting negatively on the business.
Jodi Lynn Karpes – “Formalise all processes and systems”
4. Start how you would like to finish
I felt it was important to formalise all processes and systems within my business, from the beginning. As such, as soon as I had an accountant and registered as a CC, I began getting payslips. That was in 2007/2008.
5. Keep money in the business
I keep the money in the business as it increases the value of my business, mitigates risk and ensures that there is cash flow should clients pay late, if I have to carry expenses for a client and for the monthly operating and running of the business.
6. Plan ahead for debit orders and interest
I pay myself the minimum possible, based on my personal financial obligations. I make sure I pay myself enough to cover debit orders.
Lisa Linfield – “Fund the investment”
7. Have an emergency fund
The real challenge is that when the business is growing you have to invest in its growth, often before revenue kicks in. [Have enough money saved to pay for] three months’ worth of expenses, which means that you can survive the cyclical dips in revenue. Going forward, the aim is to have money saved up to pay for up to six months’ expenses.
8. Separate your business and personal bank accounts
Once entrepreneurs have built up a track record of an average of six to 12 months [and know how much they can live on], they then should pay themselves a salary of 80-90% of that amount. This ensures the business remains liquid, and has cash in it to survive the tough times.