Don’t mix up your income and expenses with that of your business. Here are some important things to think about when your new venture starts making money.
One of the most common mistakes entrepreneurs make, especially during the start-up phase, is not clearly separating their own cash from the money that belongs to their business. There are many reasons why this is a bad idea, such as:
It shows a lack of financial know-how
When funders, banks or investors take a peek at your business’s bank statements and see purchases for takeaways, school fee payments or regular withdrawals of cash, they’ll know the business funds are being used for your personal expenses, which is a red flag for bad financial management.
Difficulty keeping track
Having a dedicated business bank account means that any expense paid by the money in there, and any funds going into the account are business related. This makes record-keeping and tax returns a lot simpler than sorting through transactions that can’t be accounted for.
You’re at risk of overspending
If you receive and spend money for yourself and your business from a single account it can be confusing to keep track of how much you can allocate to personal expenses. You could easily misappropriate money that should have covered this month’s salaries, office rental or stock purchases.
You won’t look very professional
It’s one thing using your business bank account for personal expenses, the opposite – using your personal account for your business – is not much better. Clients might feel uneasy about paying for a product or service they’re interested in to a personal savings or cheque account. Having a business bank account in the name of your company shows clients that you are a legitimate business and not a fly-by-night.
So how do you pay yourself?
Whether you’re running your business as a side hustle or it’s a full-time commitment, you’ll get to a point where you will want (or need) to take some of the revenue for yourself. The best way to do this is to pay yourself a “salary” – there are different ways to do this.
You can choose to take an owner’s draw, which is when you, as the owner, take funds out of the business for personal use. These can happen at regular intervals or when needed, and the amounts can fluctuate according to how much you need and have available in the business. The payments will appear on your business’ bank statement as an expense, which means it will not form part of the profit your business is taxed on. You will, however, be taxed on these draws as part of your personal income tax.
The other option is to pay yourself an official salary. To do this you will need to register with SARS as an employer (which you might have already done if you have brought employees on board). You can then set an official, monthly salary for yourself and deduct PAYE tax to be paid over to SARS every month.
How much should you pay yourself? Ask yourself these questions:
- How much would a business like yours pay someone doing the work you do?
- Is this amount fair considering your duties?
- Is it enough to cover your personal living expenses?
- Can your business remain profitable if you pay yourself this amount every month?
Should you be in a position to pay yourself (and any employees you might have brought on board) a set official, monthly salary, you will need to register with SARS as an employer and deduct PAYE tax to be paid over to SARS every month.
Don’t drain the bank account
If you’re fortunate enough to be turning a good profit sooner than expected, tempting as it might be, don’t take all the money for yourself. Always leave some in the business for the following:
- Rainy days: Times might be good right now, but if the past two years have taught us anything it’s that things can change drastically without warning. You’ll want a financial cushion to keep you afloat should you hit stormy waters.
- Put it back into the business: Use extra earnings to grow your business through new products, premises or staff. You could also allocate some to strengthening your marketing initiatives and keep your customer base strong.
- Investment: Look into the various investment products in the market for small businesses. You can find flexible options that allow your monthly contributions to fluctuate like your income but still allow your money to grow. This money could provide a buffer further down the line should you experience unexpected challenges or it could be used to fund your expansion plans.
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