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All too often in the early days of fledgling businesses, you hear tales of individuals not paying themselves, reinv...
All too often in the early days of fledgling businesses, you hear tales of individuals not paying themselves, reinvesting money in their company at the cost of drawing a sensible wage and,
worst of all, using personal sources of credit to carry their business through the early days.
Many businesses do start on a shoestring budget, and there are plenty of inspiring tales of people starting businesses with a tiny loan from a relative, but unless you want to spend an extended period being “business poor,” you really need to be a little more forward thinking.
Ultimately, if your business plan is sufficiently compelling, you should have no problem convincing banks or investors to bankroll the early days of your business sufficiently to give you a sensible wage. In this article, we present four simple steps to ensure you don’t leave yourself “business poor.”
If you’re just starting a business, your salary expectations should be fairly low, but you’ve still got to eat, pay your personal bills, and perhaps support a family – so there’s no point in fooling yourself that you can live on less than is realistic.
Work out what you really need each month and add on a small contingency for those unexpected expenses. Then, work out how much your business needs to pay you this sum. There are sure to be tax and social security implications that mean your company has to pay out more than you receive.
When you run a business of your own, there are often various different ways to structure your own payments, so be sure to consult an accountant to find out the most tax efficient way to pay yourself.
Running a business is never a simple case of “money in – money out.” Often you have to complete work before raising an invoice, and then wait upwards of 30-days to receive the money. In the meantime, you may need supplies for your next contract that need paying for in advance.
This situation often leaves businesses in a situation where they are perfectly solvent on paper but have nothing in the bank. You must consider this when working out how to reliably pay yourself, and have plans in place (and possibly overdrafts!) to carry you through the times when cash just isn’t in the right place at the right time.
When you make your initial business plans, you should be able to identify a point when the projected money coming in becomes enough to meet the business’ outgoing expenses with no problem. It may be six months from the start and it may be longer – these things can vary hugely between business sectors.
Once you have an indication of when your business will be able to support itself, you can make financial plans to get you to that point. This could mean a bank credit facility to carry you through with enough money to pay yourself until you break even, or even a family or personal investment.
The most important thing is that you still walk away each month with enough to put food on the table. If not, you could find the enthusiasm for your new business waning when you’ve barely gotten things started.