Should owner-managers pay themselves a salary?

Question:

I own a signage shop.  I have only five employees – four operators and an all around utility man.   I  supervise my workers, talk with clients, do the bookkeeping, purchase the materials, prepare quotations and bids, etc. etc. Sometimes, I’d also do operations work side by side my workers.

The business pays the bills and the salaries and gives some nice profits at the end of a contract or job order (we usually deal with institutions or local governments on a job order basis).   But am I supposed to get a monthly salary, too?  Or should I just withdraw personal money from the business account as needed like what I am doing now?  A friend, another proprietor, told me what I am doing is bad for the business.

Allan R.

Taguig City

 

Answer:

Most start-up entrepreneurs are willing to forgo a salary when their business is not yet solvent.  They go without a paycheck in order to keep their companies afloat.  They’d pay their employees, suppliers, and utilities first and themselves last. This is natural, but should not be done indefinitely.

It makes good sense for you to pay yourself a regular salary.  After all, you work  harder than anyone else in the business.  It is logical you should be in the payroll the same way your workers are.

Some entrepreneurs think the profit they earn is all they are entitled to. But that is a mistake and is one of the most common accounting mistakes small business owners make.

Think of it this way:

You actually wear at least two hats in your business:  as owner and as manager (and as you said as worker as well).

An owner receives a return on his capital or what you call profit.  An owner may also withdraw cash from the business in the form of drawings.  These may be advances on the profit or a loan.

A manager/employee – which you are as well – is compensated for his  labor in the form of salaries and benefits, including bonuses.

So, keep those two roles separate.

To gain a true perspective of the financial health of your business, your labor should be fully costed.  Sporadically drawing money out of the business distorts its operating performance and endangers its financial health.

Think in terms of what would happen if you sold your enterprise, or employed someone to run it. Would it be profitable? If the answer is no, then you might just have yourself a job rather than a business.

Your salary need to be factored into your costing as overhead expense.  Needless to say, this has to be reckoned with, too, come tax-paying time.

Establish an amount you should think would be fair compensation for you.  To determine this, you can make a study of compensations of people who own and manage the same type of business you have.  You can also base this on the average income your business makes monthly. If business is good, you can even give yourself a raise, same thing you do to your workers.

Once the amount is fixed, draw your paycheck and save the rest of your cash for the future. To make this work, you need to have  two different bank accounts:  a business account and a personal account.  That follows the principle of keeping things separate.

 

 

 

 

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