4 reasons to Pay yourself really Sexy Wages*
We Own our Businesses to Prosper – yet so often we underpay ourselves.
How many times have you been advised by your Accountant to reduce your profit or takings?
Something along the lines of:
– “Don’t make too much profit; keep your salary low – otherwise you will have to pay more tax”
– “Keep your profit to a minimum – in fact, ideally try making losses”
– “Excellent work, we can use this loss to offset xxxx….”
Are you truly worth less?
(or is that “worthless”?)
Don’t forget, it is the job of accountants to legally “re-categorise”, shuffle and construct things to legally minimise your tax (that is why you pay them). Unfortunately, the tax processing often makes it difficult for you to see what you are getting back for all your blood sweat and tears. It can also be hard to understand what your efforts and risks are actually worth. When you take away the tax-minimising-magic are you really getting a great deal by running this business? – is the deal good enough to justify continuing?
*Sexy Wages – for this post I am lumping all “takings” and “profits” that any owner receives from their business as the single phrase “sexy wages”. This article isn’t about how you categorise the money you take (and there are often good tax reasons for splitting it up) this post is simply about reminding you to take ample money to reward yourself for ALL the investments you make.
Profit is the Perk of Risking your Time and Money
Adjust your thinking and start to consider your takings, salary and business profit as “sexy wages”; the rewards for the time you spend, and risks you take, in running your own business.
As an SME Business Owner we undertake 4 kinds of activities for our businesses, and we deserve to be paid well for every one of these:
- Worker – doing stuff; serving customers and clients etc
- Manager – co-ordinating stuff; making sure things run to plan and the timing and quality of goods and services are up to scratch
- Director – deciding stuff; creating the plan, look and feel of the business including business strategy, and future directions
- Owner – investing stuff; providing the backing, guarantees, and money to start (and often grow) the business
Having trouble improving your profit? – check out this post 5 FREE ways to improve Profit using Little Things
Do you pay yourself the Sexy Wages you really Deserve?
To find out – Here is how to do the calculation, firstly on rewarding yourself for your time and then secondly for your financial investment – be sure to add them both together to calculate the wage* you really deserve.
A. Time Reward
Step 1 – What do you Do?
It might be hard to actually work out exactly how much time you spend wearing each of the above four hats daily, or during a single week. BUT if you look back on the last year, overall, you can most likely work out a rough average that splits up how you spend your time…
Step 2 – What are you worth?
Take these rough averages and for the time split from Step 1 and establish what you would pay someone else to do each of these three roles for you. Don’t forget to include overtime, sick leave, holiday pay and all the other benefits that your staff get (the things you most likely never take). The calculation should show less for worker wages than manager wages, and a bit more for executive wages – added together this will constitute a fair salary for your overall time.
NOTE: We not saying you should get a job elsewhere, but if you were sick what would the three part-time people needed to fulfill each role reasonably expect?
B. Money Reward
Step 3 – What is at Stake?
Consider how much money you have invested in you business, loans at start-up, money to buy stock & equipment, profits reinvested, being a guarantor etc etc Add up all of these to get a total and then work out a reasonable annual interest payment for making this investment. If you are not sure what “reasonable” is, use your current annual credit card rate as a guide and multiply that by the amount you have invested into your business.
NOTE: If you have borrowed money FROM the business, as well as investing money into the business, then offset any loans TO you against any loans BY you to get to a net total before calculating the interest.
Step 4 – What is Your Sexy Wage?
What you deserve is a combination of rewards for the time you spend and the risks you take. Total up your answers from Step 2 and Step 3 to get a reasonable approximation of what you are worth. A really sex wage will also include some extra “bonus”!
i.e. you are adding the amount you are due in salary, to the amount of reasonable interest you are due, to work out what is a fair return for what you contribute in both money and time; that is the basic value you SHOULD be paid, or you may as well sell up and get a job because then you would get the same money for no risk. The key here is the “sexy” part – the extra bits you get paid as a result of the special X-factor you bring to your business.
Step 5 – Are you getting Enough?
Measure what you take by:
a) adding up what you receive from your pre-tax business profit each year in drawings, perks, superannuation, salary etc….You don’t have to show anyone but yourself so be extra honest and include all those Officeworks purchases you took home “accidentally” and any “business lunches” you might have had – don’t under-estimate the rewards you really take by leaving this out.
b) Adding the total from a) to you post tax business profit will calculate the total Rewards you are receiving right now! (Your Post Tax Profit is the number at the very bottom of your Year End Profit and Loss Report).
Yes, it is a little hard to put a value on the happiness our business and customers bring us each and every day (and perhaps to value to in monetary terms the trouble they sometimes cause), but on the flip side many employees have rewarding, happy jobs too.
Are you paying yourself a really sexy wage, or are you missing out just so you can dupe the taxman? Maximise your profit, get your tax accountant to worry about the compliance and admin, and make sure you reward yourself as well as possible – just like Gina Rinehart, or Rupert Murdoch or any other really successful business owner you can think of. Ask yourself, as you contemplate what you are currently receiving “Is my pay really sexy?”. And if the answer is “NO” then stop worrying about what goes to the tax man and start putting yourself first.