Building a startup from scratch is an uphill battle that takes discipline, hard work, and a little luck. And that’s disregarding the countless businesses that cease operations beforehand.
Anecdotal evidence says that startups may even take three years or more to achieve a positive net cash flow.
With such a finicky and delicate position, entrepreneurs face an age-old dilemma.
Should I pay myself a salary or should I leave it on the business?
The answer is YES, and here’s why.
Builds Up Your Personal Savings
According to a survey with over 1,000 participants, 38% of small business owners do not take a salary.
That’s a sizable portion of business owners who deem it necessary to not pay themselves.
There’s a sense of pride when we undergo self-sacrifice by taking nothing to grow our startup as fast as possible.
But while this looks intriguing, both self-paying and non-paying entrepreneurs are not exempt from the unpredictable risks of starting a business. Startup founders who go the non-paying route run the risk of facing personal bankruptcy if they’re not careful.
So instead of restricting money from entering your bank account, don’t be afraid to set aside some for personal needs.
Analyse and assess the financials and the projections, and give yourself enough to fulfill your basic living expenses. However, don’t try to persuade yourself into giving yourself more than you need for expensive luxuries; always be practical. Course it through your accountant or financial partner to have it contracted and regularised.
Building up your savings not only benefits you as the owner, it also helps the health of the business.
And as the owner of the business, your savings are instrumental in scaling your venture in the future.
Entrepreneurs Need Emergency Funds
Running a new business entails exposing yourself and your employees to a certain amount of risk.
So to combat these risks, having a financial cushion can help you go through the bad months that can occur every now and then.
Your emergency fund is funds set aside in case of any unexpected occurrences, like hospital bills or car accidents.
Usually, the amount is specific to your lifestyle, where you live, and the number of dependents that you support.
But for entrepreneurs, the significance of the emergency funds rises exponentially.
While emergency funds of three to six times the income are usually recommended for day job earners, entrepreneurs are different. It’s not unheard of for entrepreneurs to have 12x as much to keep their business afloat when things go awry.
And aside from side hustles, where else can you source emergency funds than from the business that you’re growing 24/7?
By being a part of your company’s payroll software system and sticking to it, you make tax filing season much more pleasant.
If you withdraw large amounts of money at irregular intervals, the tax office could be suspicious of your business. It can even lead to an audit of your company.
Not only that, but having a standard salary can also be a good look to your employees. It adds a layer of security and professionalism.
By establishing a fixed salary rate as early as the business plan, you avoid a plethora of headaches for the future. And of course, you’re also free to grant yourself and your employees incremental wages as the business starts to look up.
Keeps Your Business In Good Legal Standing
Any competent startup founder should follow the legal obligations of running a business.
A sole proprietorship, a partnership, and a corporation all have different structures of payment. A sole proprietor has more freedom and is less complicated when it comes to withdrawing money. But a corporate structure has to take shareholders or stockholders in the picture, as well as dividend payments, before withdrawing money.
While any new startup founder may find this process painstakingly convoluted, there are professionals like the LegalVision NZ Contract Lawyers who ease you throughout the process.
They can assist you with legal assistance by drafting new contracts, resolving contract disputes, identifying preferable types of contracts, and helping you understand contractual legal obligations.
Jason is the Marketing Manager at a local advertising company in Australia. He moved to Australia 10 years back for his passion for advertising. Jason recently joined BFA as a volunteer writer and contributes by sharing his valuable experience and knowledge.