Starting a business and growing a business are strangely two different things. What I mean is, the things that get a business started are not the things that help a business grow. We often see this problem when people start small or bootstrap businesses. One of the concepts that people struggle with most is when you tell them they must allocate a salary to themself from the business. It feels strange but there are 5 very good reasons you need to do this and we will discuss them below.
You are not your business and vice versa
A business is like a baby in some regard. Sure, you gave birth to it or sired it. It clings to you for everything it needs and it is really inseparable from you at the start. However for it to grow there is some letting go required. It is important to learn to separate yourself from your business. Business structures like companies do this by recognising the business as a separate legal entity from its owners. Hence, we need to start doing this as soon as possible even if we have not formalised or incorporated our businesses.
The reason why this separation is so important is that growth takes money. For your business to grow, you will need to invest money in capacity and activities. Drawing a salary helps to draw that line between how much you are entitled to and how much of the business’s profit can be reinvested to help the business grow. When this line is blurred, what often happens is a counterintuitive practice where all the profit is taken out of the vehicle that generated the profit. Shouldn’t we be ploughing back money into something that generates profit from it?
Setting yourself a known salary amount also helps when it comes to budgeting. You know exactly how much you will earn from your business or at least have a range to work with. So you can plan your life and expenses around that. The other side of this can be very ugly and I’ve unfortunately seen it up close. When you regard the businesses’ money as yours, you are likely to draw money as and when needed. What you really end up doing is taking away money from the business’s budget which can have disastrous effects.
Another element to consider here is taxes. This is not something many people think about especially when you start a micro or nano business but it’s good practice to get this part right even before you are formalised. When you take money from your business, there are two ways to do it, salary or drawings. If you are incorporated, drawings become dividends. Depending on the business structure, this money will either be considered as salary, which attracts Pay As You Earn (PAYE) or dividends which attract dividend tax. While dividend tax is lower, it’s unusual to pay 12 dividends, and ZIMRA will have an eye on you.
You don’t work for free
You worked hard to set up your business and get it in motion. By no means should you do all that work for no money? You wouldn’t work for free in someone else’s business and you shouldn’t work for free in your own business. So attaching value to the work you do helps keep things realistic. It also helps you keep sight of just how well your business is doing. Your business may be doing well enough to turn a profit but if it cannot afford you a worthwhile salary without bankrupting the business, perhaps it’s not doing as well as you think.
The sooner you start the practice of awarding yourself a salary, the sooner you get into the habit and avoid behaviours that can unwittingly destroy your business.