For many businesses, particularly in the startup phase and when the business is growing, you pay yourself last with whatever money you feel you can afford to take from the business. Let’s face it, it is called “take home”.
Napoleon Hill, in his classic book “Think and Grow Rich”, advises his readers to pay yourself first and then pay the bills in the business. I wholeheartedly agree with his view and yet many of us struggle to do so.
I believe that there are four different ways to calculate your take home and they tend to follow one after the other.
The first phase is to calculate your take home as the balance left in the bank account after all the bills have been paid. For many, this will mean that your take home is nothing at all. If your business is in the early days of startup, this may be acceptable as long as you have other financial resources to pay your home bills. However, this should only be considered on a short-term basis. A budget and cashflow projection for the business will show how long this should be allowed to continue, and it is important to put a time limit on this phase.
Once you have some income coming into the business, the next phase is to take the minimum amount you need to pay the basic home bills. Like the first calculation, this is not ideal and should be expected to continue for a limited period of time.
When the business has regular income and you start to feel that there is surplus money in the bank most months, the time has come to increase your take home to an amount which may more reasonably resemble a basic wage figure. Depending on the structure of your business, this may in fact be the start of paying yourself a formal salary, or simply increasing the drawings from the business. Either way, be aware of the income tax liability which will arise from your take home and factor it into the amount of the take home.
My fourth calculation is taking home the salary you would have been receiving if you had continued to work in your corporate job. Now for some businesses, this will be quite feasible. For others, the business may need to be at a far greater level than you want to sustain that level of salary. Or, alternatively, calculate how much you would have to pay someone else to do the job you do.
How much are you paying yourself from your business? Are you at the third or fourth phase? If not, have a good look at your business income and expenses, and see whether you can increase your take home and reward yourself better for the work you are putting into your business.