3 Steps To Paying Yourself A Regular Salary (Even When Revenue Is Inconsistent)
"So how do I ACTUALLY pay myself a salary?"
This is one of my favourite questions to get from my clients because it means they are actually PLANNING to start paying themselves a regular salary.
This is a HUGE milestone for any business owner or entrepreneur!
And for a lot of my clients it's not like they haven't been paying themselves anything before, it's just that it's been sporadic.
Dipping in and out of the business account as needs arise.
Paying for the kids school trip...
Or the electricity bill...
Or the odd evening out...
Or just other household expenses...
It's sporadic, it's tactical but it's not very empowering.
Paying yourself a monthly salary is different.
It's a big act and leap of faith in yourself and your business.
It's drawing a line in the sand and saying you're committed to making this business work.
And it's saying you're damn well worth being paid!
It can be a powerful, if somewhat nerve-wracking, moment!
And before you get to this stage you'd assume working out how to pay yourself would be pretty obvious.
And if you've been paying yourself a regular salary for some time now you may question how people could not know how...
BUT for a lot of people who are asking this question, setting up a regular payment to themselves is a new thing.
Plus they're usually still growing their revenue streams and income is often unpredictable and inconsistent month to month - one month they may sign up for clients, another month might be none. Some have upfront payment terms, others don't get paid until the end (though this isn't recommended just FYI!)
Add to that the challenge of business expenses and annual subscriptions often being lumped together and it's enough to make any conscientious business owner a little anxious.
So figuring out just how much is 'safe' to transfer and pay yourself every month without putting the business at risk, or having to put money back IN during the quiet months, can be a little tricky.
Now there are actually several methods you can use however this was the one I used when my business was first getting off the ground and it's a great place to start.
Here are the 3 Steps To Paying Yourself A Regular Salary (Even When Revenue Is Inconsistent):
STEP #1. Create A Safety Buffer
I don't know about you, but I'm a fairly conservative when it comes to money. I like to make sure I have a decent financial safety buffer before I make any withdrawals.
A financial safety buffer is simply a reserve of money in your business bank account to cover upcoming expenses. You would only make salary withdrawals when the balance of your account is above this reserve.
Now how much buffer you want to have will depend on
Your average monthly business expenses,
How frequently and consistently revenue is coming in,
Your tolerance for risk, and
Your personal financial pressures and obligations
Generally speaking the more inconsistent your revenue streams the greater the safety buffer you want to have to ensure you can continue to pay all the bills necessary to keep your business running even if you hit a few lean months in revenue.
As a starting point I recommend leaving between three to six months of buffer in your business account before setting up a regularly salary payment.
NOTE: you could do more, you could do less, but I recommend having at least three month worth of business running costs left as reserve in your business account.
To calculate your financial safety buffer, go to your Business Budget, divide the annual total expenses by 12 to get your Average Monthly Expenditure and then multiply this figure by how many months buffer you want to have in your business account.
Annual expenses = $24,000
Divided by 12 = $2,000 average monthly expenditure
Multiplied by 3 months = $6,000 safety buffer.
Or if you wanted 6 months safety buffer it would 6 month x $2,000 monthly expenses = $12,000 safety buffer.
STEP #2. Calculate Your Profit
Once you know how much safety buffer you want to have in your account we then work out what profit you have left to pay yourself with.
PRO TIP: Paying yourself a decent salary should already be factored into your pricing so once you're fully booked you'll be earning your ideal salary every month (Discover how here). However when you're not yet operating at full capacity, you'll be paying yourself a portion of that salary to start with.
Let's take our earlier example:
Three month running costs are $6,000 (average $2,000 per month) and you usually generate around $4,000 per month in gross profit (which for the purposes of this exercise is revenue minus any cost of sale).
As long as your business bank account is greater than the $6,000 (which is your three month safety buffer) then you can, and should, transfer a fixed salary amount every month.
In this example you might transfer up to $2,000 every month (average monthly revenue of $4,000 minus average monthly expenses of $2,000 = average salary of $2,000).
However, let's say your revenue isn't yet that consistent. Some months it might be $4,000 some might be $0.
Here are two approaches you can take to get yourself into the routine of paying yourself a salary regularly.
Once your business bank balance has reached your safety buffer, the next time revenue comes in, pay yourself at least half of it as salary.
NOTE: you could pay more if you need it, but paying yourself only a portion starts to build up your financial reserves to start paying yourself more regularly next month
If you can, wait another month to build up your financial reserves. At the end of the month see how much extra you have in the account over and above the safety buffer, after you've paid expenses (yes, this is technically paying yourself last, however as long as you've built your salary into your pricing once you start to gain more consistent income you'll be able to pay yourself first).
Divide what's remaining by 3.
You can then use this figure as your salary payment for the next three months to pay yourself a consistent salary.
Say after another month of trading your business account is now up at $6,900 after expenses. If your safety buffer is $6,000, you'd then have $900 to pay yourself. Yes, you could just transfer it all, and if you NEED it all then go do so - your business is there to provide for you!
However if you're personally not at the point where you need every cent you can lay your hands on then I'd recommend starting up a regular salary payment habit first. In that case, you'd divide the remaining $900 by say three months, and plan to pay yourself $300 each month.
At the end of the three months (or sooner if you like) repeat the process above and calculate your next three month salary payments (which at this point should be higher due to more revenue and profit accumulating).
Rinse and Repeat
STEP #3. Make the payment
Now it's time to actually pay yourself.
To start with I recommend making a manual payment transfer each month once you've checked your business safety buffer.
If you want to, you can move to an automatic payment once income becomes more consistent. However I always recommend checking your business account balances on a regular basis throughout the month.
IMPORTANT: If your business is registered as a Company (of which you are therefore an employee and/or shareholder) it's important to speak with your accountant first to find the most tax effective way to make the payments, as how you pay yourself can have a big impact on the tax you have to pay at the end of the year.
Once you're operating at capacity you'll be paying yourself you goal salary every single month.
And if you ARE operating at capacity (ie. you're maxed out!) but still not able to pay yourself your goal salary every month then you need to get your pricing sorted so you are being rewarded for all the time and energy you put in to making your business a success. You can get started paying yourself what you're worth here.