Scott Gardiner, sales manager of the SME solutions division of MYOB NZ.
There's a key question anyone mulling over a new business concept needs to ask themselves, says Scott Gardiner: can this business afford to pay me?
Answering that question will provide a good reality check, says the sales manager of the SME solutions division of accounting software firm MYOB NZ, because being your own boss might offer you freedom and creativity, but it's also a lot of work.
"Unless your business can meet your expectations in terms of what you and your family need not only to get by, but also enjoy a good standard of living, you have to think really carefully about whether it's worth the sacrifices," Gardiner says.
This week I've interviewed business owners about how they pay themselves - with an emphasis not on the amount they pay themselves, but how they figured out how much was appropriate, and how their processes for assessing this may have changed as their businesses matured.
Gardiner says most people getting new businesses off the ground won't be able to pay themselves from their venture for several months - or longer.
Cashflow is more crucial at this time than ever, and keeping the business liquid enough to cover expenses takes precedent over the owner's paycheque.
Diane Stanbra is the owner of Picnic Box, an Auckland-based firm that creates boutique boxed picnic food for functions and events, which she founded in late 2011.
Stanbra had a full time job as a business development manager until the end of this October, which she used to support herself as she grew her own company. But having consistently exceeded forecasts in recent months, Picnic Box is now generating enough revenue to support Stanbra working in the venture full time.
However, figuring out how much to pay herself in these early days has involved keeping an eagle eye on cashflow.
"It's a balance of what the business can afford and how much I need to live on," Stanbra says. "It's a monthly amount based on the minimum I need to draw to live on, so I had to carefully manage by personal budget. I only draw from the business account when I know it's feasible, which means carefully managing cashflows in all areas of my life - business and pleasure."
James McCarthy is CEO of aviation safety company Spidertracks and says the company's owners had a policy of accruing remuneration to themselves as soon as they started in 2007.
"This dealt with any inequity between the shareholders, who were putting different amounts of time into the company," explains McCarthy. "It obviously has a negative cashflow effect if you're paying tax on income that you haven't received, but I think doing things that way was worth it to maintain a perception of fairness between our shareholders. Initially we weren't paying ourselves market rates, though; it was probably more like 50 per cent of a market rate."
But things have changed as the company has matured. The firm brought in an independent board three years ago, and since that time all salaries are now paid at market rates, and reviewed annually by the board's remuneration subcommittee.
McCarthy reckons once a business is up and running, paying yourself a market rate salary is key.
"If your business isn't a worthwhile investment once you're paying yourself a market salary, you're possibly not in the right business, or you're not the right person for the job," he says.
"Ultimately a necessary endpoint may - and I think it really should - be to move out of your executive role. And when you do this you want your salary to fund a suitable replacement, while your business still provides returns, such as dividends, to you."
Nic Gibbens is the CEO and founder of Wellington-based mobile apps firm PaperKite, which will celebrate its fifth birthday this coming March.
Gibbens left a high paying corporate job to start the company, and during his first year or so in business used the $20,000 he had in the bank to pay his mortgage, and get enough jobs to otherwise keep his head above water.
About 18 months in, he and company's head of client services Leanne Clarry (who's also a shareholder), began to pay themselves a few hundred dollars a week.
"Then with every job we did we'd put a third of that money into the business, a third into the cost of the contractors we were using, and we'd split the other third between us. That was just a model we thought would work, figuring if we did good work we'd make more money," he says.
Gibbens says there have still been times when he's had to put more money into the business and forsake being paid himself to ensure staff get paid as usual. However, the company has hit its stride now, meaning he can be paid accordingly.
"This year has been a non-stop amazing year; we've been busy all the time and everything has grown. So I think this coming year I'm finally actually going to take my salary up to match what it was when I left my corporate job - and hopefully beyond that by the end of the year."
Scott Gardiner is sales manager of the SME solutions division of accounting software firm MYOB NZ.
At what stage in a new business should the owner start paying themselves?
One of the key tests of any new business concept you're contemplating should be 'can this business afford to pay me?' It's possibly one of the best reality checks you can give yourself because although being your own boss offers a lot of freedom and creativity, it's also hard work. And unless your business can meet your expectations in terms of what you and your family need not only to get by, but also enjoy a good standard of living, you have to think really carefully about whether it's worth the sacrifices.
The reality for most business owners is they may have to wait several months - or longer - before they can afford to take enough out of the business to pay themselves. In any startup cashflow is crucial, and keeping your business liquid enough to cover all your expenses will be more important than your own remuneration from the outset. Knowing this beforehand is important, because it allows you to think about how much you'll need to set aside to live on while the business finds its feet.
Should a business owner pay themselves a regular amount, or are there benefits in keeping things flexible?
Most business owners make it a practice to pay themselves last, after all the expenses and other costs have been paid. This means it's a good idea to factor in some flexibility to make sure your business has enough funds to operate - particularly in the early stages.
But planning from the outset to pay yourself is good discipline, and should be an important part of your business strategy. This means you can factor in your living costs as one of the operating costs of the business, and ensures you're more likely to get paid regularly.
Are there formulae or guidelines owners should use to figure out the right amount to pay themselves relative to how their business is doing?
This is a key question to ask your accountant when you're planning your business. What you're looking for is the payment option that, based on your personal circumstances, is most tax effective. This could be a salary, dividend or drawings - or a combination of all three - that provides the best return based on your needs and situation.
In thinking about setting a salary, after you've looked at the tax implications, you should also think about the long-term future of the business. Paying yourself a reasonable market salary helps establish the true cost of the business - and that's something that's really important if you want to sell your business in the future.
When and how should business owners review their own pay?
It's a good idea to set yourself an annual income review as part of your regular planning cycle. This will help you evaluate whether the business is returning what you expected, whether you need to change anything to stimulate more growth, and if you can afford to pay yourself more in return for exceeding performance targets.
Again, it's likely most small business owners, especially in the startup stages, will be looking at what they can afford to pay themselves more regularly. But once you get into a pattern, it is important to regularly review - and keep in touch with your accountant to see if the arrangement you set up at the outset is still the best one for your business. The structure of your business is also important to think about when reviewing what you pay yourself. Sole traders, companies and partnerships all have potentially different things to consider, so it's important you seek good advice from your accountant.
What are some common mistakes business owners make in this area?
Business owners tend to pay themselves either too little or too much. Many start out setting themselves what they think is a reasonable level of remuneration without considering the additional responsibilities of running a business. Because you aren't just 'buying a job'; as the business owner you're responsible for everything - from sales and marketing to tax management - and all of these responsibilities take time. A good indicator is to add up all the hours you put into the business and divide that by your actual salary. If it's less than the minimum wage - and it often is for small business owners - then something needs to change.
On the other end of the scale, business owners can be tempted to take more cash out of the business than it can really afford, especially when things seem to be going well. This comes down to understanding cashflow; even if you've had a great month, buying that new ute might be best left if you're heading into a slow period, with a large tax bill to pay.
Another common mistake is not clearly defining what's personal and business expenditure. This can cause problems either by overpaying tax - because you haven't properly included costs that might have been included with personal expenses - or underpaying tax by assuming costs were all business in nature.
Lastly, what are your three key tips for business owners who want to get this right?
• Be realistic. The first test of your business should be can it pay you the income you need.
• Understand your business. Keep regular track of your business' key performance indicators, especially cashflow.
• Get advice. The advice of a good accountant or business advisor in this area can make a real difference to how much you get out of your business.
It says it's collateral damage in the city's war on Airbnb and will try again elsewhere.