Think back to the days before you started your business, when you were working for a boss. Chances are you were rewarded for your hard work with a regular salary. It may not have always been the same amount, but it came through like clockwork. And for the next week, month or however often you got paid, you’d do your best to make it last.
But now you are the boss, and so you don’t need to be restricted to a set salary, do you? You can simply draw money out of the business whenever you need it, right?
7 good reasons to pay yourself a regular salary
As a business owner, here are seven reasons why you should pay yourself a regular salary instead of treating your business like an automated teller machine.
1. It’s what you’re used to.
When you first started working for someone else, you couldn’t ask the boss for more money whenever you ran out. All you could do was hold out until the next time you got paid. And having a regular income also made it easier to budget for your income and expenses, manage your money, and save up for a mortgage or investment.
So why change now?
2. Much of the money in the business’ bank account is already spoken for
It’s easy to think all the money sitting in your business’ bank account is yours. After all, it’s your business, isn’t it?
But that money actually belongs to the business—not you personally—and is needed to cover things such as:
- Salaries and wages
- Paying contractors and suppliers
- Stock purchases
- Rent and utilities
- Future tax payments
It doesn’t matter how profitable your business is. If the money isn’t there to pay the bills when they’re due, your business is as risk of becoming insolvent (i.e. you have more commitments and bills to pay than cash or available funding to pay them with).
Having sufficient cash flow is vital for any business. And it’s far easier to manage cash flow when you have predictable expenses you can plan around—including your salary.
3. You need money to grow your business
A growing business is a cash-hungry business. As it grows you may need to move it to a larger premises or invest in new staff or technology to grow your capacity. Even if you can keep a lid on your fixed expenses, your business may require an increase in variable inputs such as materials.
And all this ties up cash.
So whatever your growth plans, you’ll need enough money in reserve to fund them. And that’s on top of the money you need to keep the business running at its current level.
As you can see, knowing exactly what cash is flowing in and out of your business, and saving as much of your profits as you can to build up your cash reserves, is important for a growing business.
But if you keep ‘raiding the till’ whenever you’re short of cash, you’ll never know how much cash you have in reserve, or when you have enough funds to initiate the next stage in your growth plans.
4. You won’t be risking ‘lifestyle creep’
The lifestyle we lead is largely dictated by the amount of money we have readily available. So if your business does particularly well one week and the bank balance is up, you might be tempted to draw a little extra money and spend it on dinner at a fancy restaurant, a weekend away, a new ‘toy’ or some other indulgence.
It’s okay to spend money in these ways if it’s a bonus for achieving a certain result or milestone in your business. But these bonuses should still be within the planned and documented salary and remuneration package the business pays you.
If you’re not disciplined in this area, it doesn’t take long for these indulgences to become part of what you consider a ‘normal’ part of your lifestyle, and so you start drawing extra cash on a regular basis.
And that’s not good for the health of your business.
By living off a regular salary (and nothing more) instead, you’ll learn to live happily within your means, which is a key to building wealth.
5. You’re more likely to fly under the taxman’s radar
Governments’ tax departments are used to people being paid a regular salary. It’s generally how things work. And by giving yourself a regular salary, you’ll be seen as just another salary earner and be more likely to fly under the radar.
If, on the other hand, you start drawing large amounts from your business at irregular intervals, you may raise a few eyebrows with the governments’ tax auditors. And that’s never a good thing.
6. You could be creating a tax liability for your business
When wage and salary earners are paid, the employer must withhold and set aside a portion of their pay as tax, which is periodically paid to the government on the employees’ behalf.
When you withdraw money from your business, it’s not ‘free money’ (i.e. tax-free). These amounts, depending on your business structure, need to be properly accounted for as:
- drawings or a loan from the business
- dividends (a portion of your profit).
Your actions here could be building up a potential debt that will need to be paid at some point. And that debt could lead to severe cash flow problems down the track, especially when it comes time to sell the business.
You’re much better off accounting for, setting aside and paying taxes as they fall due. It will not only help your business, but also the quality of your sleep.
7. You’ll more easily qualify for mortgages and other loans from the banks
When it comes to assessing a person’s ability to service a potential loan, banks much prefer consistently earning wage and salary earners to sporadically earning self-employed business owners.
The bank wants to know you can comfortably service the loan each month, and by paying yourself a regular salary you’ll have the paystubs and bank statements to show a steady cash flow history.
So the sooner you set this up in your business, the better.
A successful business is a great way to create creation and accumulate wealth. But don’t disadvantage yourself by presenting a poor case to the banks when applying for a mortgage or other type of loan.
How much should you pay yourself?
As you can see, there are many good reasons to pay yourself a regular salary instead of continually raiding the till. The question is, how much should you pay yourself?
That’s a question we can help you answer.
Obviously you need to pay yourself enough money to cover your basic living and lifestyle requirements. The last thing you want is to be stressing about your personal finances, especially when you’re trying to make business decisions.
But it’s not a good idea to pay yourself too much in salary—even if the business can easily afford the cash flow. Depending on your business structure, there are probably more tax-effective ways to receive income from your business, such as dividends.
Every business and person’s situation is different in this regard, so it’s important to get one-on-one advice in this area. Don’t view this article as personal advice to you—it’s not. We’re simply opening your eyes to the many benefits of paying yourself a consistent salary as a business owner.
To work out the right amount to pay yourself regularly, you’ll need to consider things such as:
- What your business’ cash flow can comfortably pay you on a regular basis
- What you feel you’re worth (e.g. if you were employed by someone else)
- What will let you achieve your personal and family wealth creation goals, such as paying off your mortgage and building your investment portfolio
- Tax considerations so you pay yourself the optimum amount to meet your needs without needlessly paying too much personal income tax
- The business’ projected profitability for the financial year. (Your shareholding percentage and dividend policy on withdrawing profits or retaining and reinvesting profits in the business will determine your projected profit dividend.)
As you can see, it makes sense to get professional advice on calculating your salary as a business owner. We’ll help you work it out by taking into account your current business and personal situation. We’ll also set up payroll systems to automatically create and distribute the necessary tax-related paperwork each pay period.
You enjoy being your own boss.
Now it’s time to also enjoy being your own employee.
There are numerous QuickBooks Online reports that you should be consulting at regular intervals. But you need these five at least every week.
QuickBooks Online’s Dashboard, the first screen you see when you log in, provides an effective overview of your company’s finances. It contains at-a-glance information about your recent expenses, your sales, and the status of your invoices. It displays a simple Profit and Loss graph and a list of your account balances. Scroll down and click the See all activity button in the lower right and your Audit Log opens, a list of everything that’s been done on the site and by whom.
You can actually get a lot of work done from this page. Click the bar on the Invoices graph, for example, and a list view opens, allowing you access to individual transactions. Click Expenses to see the related Transaction Report. Below the list of account balances, you can Go to registers and connect new accounts.
Other Pressing Questions
The Dashboard supplies enough information that you can spot potential problems with expenses and sales, accounts, and overdue invoices. But you’re likely to have other tasks that require attention. How’s your inventory holding up? Are you staying within your budget? How about your accounts payable – will you owe money to anyone soon?
QuickBooks Online offers dozens of report templates that answer these questions and many more. If you’ve never explored the list, we suggest that you do so. It’s impossible to make plans for your company’s future without understanding its financial history and current state.
QuickBooks Online has many reports that can provide real-time, in-depth insight into your company’s financial health.
Comprehensive and Customizable
When you click Reports in your QuickBooks Online toolbar, the view defaults to All. The site divides its report content into 10 different sections, including Business Overview, Sales and Customers, Expenses and Vendors, and Payroll. Each has two buttons to the right of its name.
Click the star, and that report’s title will appear in your Favorites list at the top of the page. This will save time since you’ll be able to quickly find your most often-used reports. Click the three vertical dots and then Customize to view your customization options for that report (you’ll have access to this tool from the reports themselves).
You can, of course, run any report you’d like as often as you’d like. Most small businesses, though, don’t require this frequent intense scrutiny. But there are five reports that you do want to consult on a regular basis. They are:
- Accounts Receivable Aging Detail. Displays a list of invoices that haven’t yet been paid, divided into groups like 1-30 days past due, 31-60 days past due, etc.
- Budget vs. Actuals. Just what it sounds like: a comparison of your monthly budgeted amounts and your actual income and expenses.
Warning: Some reports let you choose between cash and accrual basis. Do you know the difference and which you should choose? Ask us.
You can customize QuickBooks Online reports in several ways.
- Unpaid Bills. Helps you avoid missing accounts payable due dates by displaying what’s due and when.
- Sales by Product/Service Detail. Tells you what’s selling and what’s not by displaying date, transaction type, quantity, rate, amount, and total.
- Product/Service List. An accounting of the products and/or services you sell, with columns for price, cost, and quantity on hand.
Customization, Complex QuickBooks Online Reports
Note that there’s a category of reports in QuickBooks Online named For My Accountant. That’s where we come in. The site includes templates for reports that you can run yourself, but that you’d have difficulty customizing and analyzing. These standard financial reports—which, by the way, you’ll need if you create a business plan or try to get funding for your business—include Balance Sheet, Statement of Cash Flows, and Trial Balance.
You don’t need to have these reports generated frequently, but you should be learning from the insight they provide monthly or quarterly. We can handle this part of your accounting tasks for you, as well as any other aspect of financial management where you need assistance. Contact us, and we’ll see where we might help provide the feedback and bookkeeping expertise that can help you make better decisions for the future of your business.
The hardest part of creating a budget is getting started. QuickBooks Online provides tools that can jump-start the process.
You know you should have a budget. You’re aware that it can help you stay on track with your company’s income and expenses throughout the year. Maybe you’ve even tried to make one before, but you got discouraged by the mechanics or by the difficulty of estimating money in and out for the next 12 months.
June may not be the beginning of your fiscal year, but that doesn’t mean you can’t make a serious effort to start building a budget that can help you rein in expenses and set revenue goals.
Here’s a look at QuickBooks Online’s budgeting features.
Creating the Framework
Before you begin, you’ll want to make sure that your fiscal year is set correctly in QuickBooks Online. Click the gear icon in the upper right, then click Your Company | Account and Settings | Advanced. If the First month of fiscal year isn’t correct, click the pencil icon over to the right and change it. Then click Save and exit out of this window.
Click the gear icon again and select Budgeting, then click Add budget in the upper right.
QuickBooks Online asks you the questions that need to be answered before you start filling in your budget grid.
The first thing you’ll do is give your budget a descriptive name by entering it in the Name field. Next, open the drop-down list under Fiscal year and select the correct 12-month period. You can create your budget in one of three intervals: Monthly, Quarterly, or Yearly. If you want to populate your budget with numbers from this year or last, make that selection in the Pre-fill data? field.
There’s one more option at the top of the Budgets Grid screen that’s not shown in the image above. You can Subdivide by Customer, Class, or Location. This can be useful if you want to view budget data specific to a subset of entries in each of those categories. You could, for example, choose three customers and view only their numbers in the grid individually, one at a time.
Providing Your Numbers
Once you’re satisfied with the selections you’ve made, click Create Budget in the lower right. The screen will refresh and display a grid that you can edit.
Let’s say you’re working on a budget for the second half of 2018. QuickBooks Online brought in your numbers for January-May. You see that the numbers don’t vary much from month to month on one specific line item, so you’re going to assume that they will continue to be true (unless you know something that will affect it after May). You could enter a rough average of the first five months in the JUN field.
Hover your cursor over the arrow to the side of that field, and this sentence appears in a small bubble: Click to copy the value across on the row. QuickBooks Online will then enter that number in the JUL through DEC fields.
QuickBooks Online can save you some time as you enter data in your budget grid fields.
When you’re done entering data in all of the fields relevant to your business, click Save in the lower right and close the window. Your budget will now show up in the list.
Tip: If you have multiple blank rows and don’t want them to be displayed, click the gear icon in the upper right corner of your budget page. Click in the box in front of Hide blank rows to create a checkmark.
The Hard Part
QuickBooks Online simplifies the mechanics of creating a budget, but it’s up to you to supply the numbers. There’s lots of common-sense advice that experts offer for this process, like:
• Remember seasonal upswings and downswings.
• Make your goals as realistic as possible. You might want to create separate budgets for “needs” and “wants.”
• Track your expenses carefully for a period of time so you can estimate more confidently.
• Create reports regularly that compare your budget vs actuals.
QuickBooks Online can help you with that last piece of advice; it offers a report called Budget vs. Actuals. You’ll find it in the Business Overview group.
We can help, too. Once we understand a little more about your business structure and goals, we can take a look at your income and expense history and make some personalized recommendations. Connect with us soon, and we can start you on the path to a more focused financial future.
Last month, we created QuickBooks Online service items. This month, we’ll explore how they’re used on the site.
If you ever did your accounting manually, you probably remember how tired you got of writing or typing the same things over and over. You may have had your customers’ addresses practically memorized, and your product price list was always close at hand, though you knew that by heart, too.
QuickBooks Online eliminates that duplicate data entry, saving time and reducing errors dramatically. Because of the service records you’ve created, completing sales and purchase forms can now be an easy, accurate task. You’ll also have fast access to information about your inventory levels and the profit you make on items. You’ll know what’s selling and what’s not, and when it’s time to reorder.
Much of your accounting work probably consists of filling out forms. Whenever you create one of these invoices or sales receipts or purchase orders, you already know that you can open a drop-down list and select the name of a customer or vendor. QuickBooks Online lets you enter data about what is being bought or sold in the same way.
To see how this works, open an invoice form and complete and/or verify the fields at the top (customer, date, terms, etc.). Click in the first PRODUCT/SERVICE field, and then click the down arrow to see the list of items and services you sell.
When you create a sales or purchase form, you’ll be able to select the appropriate service item from the drop-down list – or add a new one.
When you select an item, the description and price will fill in automatically. You’ll have to add the quantity and click in the box below the column labeled Tax (if applicable). QuickBooks Online will calculate the total cost of the service item on that line. If you need to enter additional sales, proceed to the PRODUCT/SERVICE field in the second line and repeat those actions until you’re done and can save the transaction.
Working with Items
What do you do when you need more information about a specific product than just its description and price? Do you have to return to its individual record?
No. QuickBooks Online includes a great tool that provides real-time updates on your inventory items and lets you work with them. Click the Sales tab in the left vertical menu, and then on the Products and Services tab at the top. The table that opens displays numbers for every item’s quantity on hand and reorder point. Look at the end of each line, and you’ll see a drop-down list labeled Edit that looks like this:
QuickBooks Online’s Products and Services page provides real-time inventory updates, as well as item-management tools.
As you can see, there are a number of actions you can take here on individual products.
Warning: If you think there’s a reason you should Adjust quantity or Adjust starting value, please talk to us first. Your inventory records need to be precise. We can schedule a session to go over this and other concepts you need to understand in order to keep inventory counts accurate.
You can take some of these actions on multiple items simultaneously. Click the down arrow in the Batch actions field above this Edit menu. Click the boxes in front of the products you want to work with and select the desired activity (unavailable ones will be grayed out in the list). Take extra care with this mass modification tool.
QuickBooks Online contains templates for numerous inventory-related reports that you can customize.
QuickBooks Online’s Product and Services screen may be all you need in your daily work, but there will be times when you need more analytical assistance. You can turn to the site’s specialized reports for more in-depth scrutiny. Click the Reports tab in the left vertical pane. Make sure the All Reports list is active and select Manage Products and Inventory to see what’s available, including:
- Inventory Valuation Detail.
- Sales by Product/Service Detail.
- Physical Inventory Worksheet.
Reports are easy to run but can be difficult to customize correctly and interpret. If we’re not working with you already on the complex standard financial reports that should be reviewed monthly or quarterly, talk to us. The more you understand about the financial status of your company, the better your decisions will be.