A common mistake and frequent business practice and mistakes committed by entrepreneurs in their early days are not paying them first. At first glance, the approach may seem noble or an aspect of the selfless nature of entrepreneurship. However, others might view it as a practical solution to cash flow shortages and other issues that are common among small businesses. The practice isn’t altruistic!
If you don’t make yourself pay first (as in principle), then you’re heading on a path to degrading yourself and destroying your life. Don’t do it!
The three caps
If you’re an owner/operator in an organization, you might be a three-person entity: the owner (CEO), operator (CEO) as well as director. Each of them has its own duties and responsibilities. It is essential to recognize the role you are wearing and what you are able to earn the rewards associated with that job.
An OWNER receives a reward for their capital, in the form of capital growth, which is usually redeemed upon capital raising or sale and dividends. Dividends are simply a percentage of the profits. It is crucial to remember that when declaring a dividend, the decision to withdraw your earnings could result in the risk of not investing in growing your company.
The owner can also take money from the company through drawings. They could be advances on profit (equity) or loans (debt).
An EMPLOYEE is paid for their efforts by way of salary, wages, and perhaps bonus or performance-related incentives. It is possible to assume a jack-of-all-trades and every hand on deck or any other kind of employee with a variety of role(s). Every position you fill should be accompanied by performance indicators and a rewards structure. For example, you could be the director of sales, the CEO of operations, marketing, or service delivery. Although I’m not suggesting that you earn five different salaries, I’m suggesting that each role must perform. Marketing must generate leads. Sales must deliver sales. Service must deliver satisfaction. The CEO has to deliver on the overall strategy.
This is the key difference: If you run an enterprise and you pay yourself out of the profits of your company, you’re rewarding yourself with not the right pool. Drawings, dividends, or profits are rewards for owners. They’re a way to reward the capital you have invested. If you decide to do this, it can be difficult for you to understand the benefits that could be offered to you should you choose to quit your job within the business and acquire a passive shareholding, that is. Quit working in the company but keep ownership of the business. This is the most typical exit option that you can use.
If you’re thinking of selling your business, be aware that you are able to exit any one or all three roles of director, owner, or employee. It is not necessary to end the three roles at once.
In the case of the self-employed model and business model are confused.
This confusion that many small-scale business owners create when they draw cash from their businesses instead of receiving wages or salaries is another proof that a lot of small-sized enterprises aren’t really companies in the first place but self-employed individuals. Anyone who is self-employed perspective is not afraid of making money out of the business since they see any distinction in their position as a business owner and an employee.
There are more than 1,000,000 companies in Australia. I would suggest that 50 percent are self-employed and, more appropriately, that have no value to the enterprise that is. The business has no remaining value in the market. The only way to leave a self-employed company is to take a break from it. In essence, you are retiring from the work you do.
The power of money
What are the subconscious messages you transmit to yourself when not making your payments first? Try these suggestions:
Time spent by your staff is much more valuable than yours.
You’re more important than your employees.
You’re not worth it.
It is a tough job that is risky and poorly planned.
Your hard work is often not recognized.
Paying you first, you pay at all, is a guaranteed way to lower your self-esteem and reduce the credibility and worth of your company as well as everyone who is. If you are operating from this mentality, the world around you will treat you with the same attitude you show yourself. Don’t do it!
There are two parties – you and your business. To get a complete view of the fiscal health of your company, your work should be priced. If you frequently draw funds from your business, it can affect the operational performance and the financial health of your company.
Consider what could happen if you were to sell your business or hire someone to manage it. Is it a profitable venture? If not, it could be that you have a job and not a company. Worse, it could be that your capital is giving you a negative return. Your money should be a benefit to you, not in the opposite direction.
Tax is not that significant.
If you choose to implement strategies for tax reduction on the advice of your tax professional, it is in a game that is marginal. In the example above, if your corporate tax rate is 30%, all tax-saving strategies you implement are marginal. Is it logical to flip your business on its head, i.e., set aside the 70c to pursue the 30c? It’s not a bad thing; tax minimization is a good strategy. It’s also a useful MARGINAL strategy. If you’re advised by a tax professional to take specific steps to minimize your tax liability, consider whether you’re playing a game of 70/30 or a game of 30/70. Tax is not a lot.
I know of a business owner who deposited an enormous lump sum in personal super in order to take advantage of his tax advantage at the end of the fiscal year (on the advice of his tax accountant). The cash flow position of the business was in a state of extreme stress over the following three months, which led to a lot of personal anxiety and stress.
The tax year is here. Take this into consideration when you sit down with your tax professional prior to June 30 during your tax planning discussion.
What are you able to do now?
In the beginning, I would suggest that you clarify the role you fill. How do you pay each one of them? Do you have enough cash flow for you to first pay yourself? Do you really have an independent model? Does your business provide any significance? Can you sell it if you want to, or do you need the option to “retire” to it? When you are clear about the issues you face, it is then that you can decide on an agenda for the future and develop the appropriate strategies to improve the situation. Start from exactly where you’re.