How Most Entrepreneurs Approach Their Compensation
Many take money out of their business account when a need for money in their personal life arises. This can range from taking draws from the company when bills are due or when personal funds get low, taking funds when the business balance seems high or simply by using the business card to cover small purchases throughout the week such as coffee, groceries, or fast food.
The problem with this approach, is that staying on top of an organization’s cash flow is hard enough, without adding in the volatility and emotion of personal finances. Hence a big reason why accounting and financial professional preaching separating business from personal. (It also makes taxes more difficult for accountants, but that is neither here nor there)
The S–S–A principles are meant to formalize how owners can compensate themselves in a fair and common-sense way. The approach may be A-S-S backwards, but it works wonders to improve cash flow!
- Sufficient
- Set Frequency
- Affordable
Sufficient
How much do you personally need to make each month to survive? To live comfortably? To retire?
Your business is meant to provide, and you deserve to be paid for your hard work, just as much as a vendor deserves to be paid for services rendered. Step 1 is knowing exactly how much it must provide and will eventually need to provide. Without these answers, you are flying blind.
Set Frequency
Once your personal finances are organized, select a pay cycle and back into a set number to pay yourself regularly. (Whether to pay as a W2, draw, distribution, guaranteed payment, is a tax conversation we encourage you to have with your CPA) The amount should ALWAYS exceed what it costs to survive, should ideally be what it costs to live comfortably and will eventually be what is needed to retire.
- Owners can also always take more money out than the standardized amount, but the goal is to not NEED to take money out.
- This pay should be able to cover households’ bills, along with all non-business transactions that occur regularly and frequently.
- This process removes emotion from the equation, makes it easier to anticipated fluctuations in cash flow and makes any extra distributions feel like icing on the cake.
Affordable
“It must be in budget” – every accountant ever.
Once you know what you will cost the business each month, we need to ensure it is an amount the business can afford. To do this, add your pay to your budget just like you would any other expense. Now the question becomes, can you earn more than your budgeted spend each month?
TAKE ACTION TODAY!
Ask yourself, how much do you need to make to live comfortably and can the business afford it?
Having trouble doing the math? Call Accounted4 at 215-801-3365 or send us a message! We are happy to provide a complimentary consultation to help you outline your first steps to better manage your cash flow.
Take the Accounted4 Challenge! Our QuickBooks Online analysis is meant to find money being left on the table. How much can we find?!
