Pay yourself first

Pay yourself first – why your salary should be your business’s first monthly expense - Australian notes and coins on a white backgroundPay yourself first – why your salary should be your business’s first monthly expense

It’s the line item most often left out of a small company’s budget: the business owner’s salary.

Let’s face it: you can always spend cash on your business. From office expenses to employee salaries to rent, every month a portion of your revenue is accounted for.

But it is vital to pay yourself first. You need to earn a living – and paying yourself can actually help your business succeed.

Here’s why you should make your salary a top priority, starting now.

It’s the first rule of wealth building

A business exists to make money, but business owners thrive when they continuously save and invest profits. If you aren’t paying yourself before your vendors, suppliers, and employees, you’re probably not setting aside sufficient funds. This money you can re-invest in your business to help grow more profits – or invest in a wealth building portfolio.

Pay yourself what you can afford monthly or biweekly and earmark a portion to invest in savings. Making consistent financial contributions throughout the year will help you build a healthy nest egg – and the sooner you start the more you’ll benefit from compound interest.

Setting up automated fund transfers from your business to an investment savings account will make paying yourself easy. After a month or two, you won’t even notice a difference in your cash flow. But odds are your growing balance will motivate you.

Avoid a cash flow crunch

There will be times where you’ll need additional funds available for your business – and borrowing from a lender may not be an option. Unfortunately if you’ve only been in business for a short time, it can be difficult to qualify for a business loan or line of credit.

When you make it a habit to pay yourself first you’ll be able to build up funds. When you need to make a large purchase, an unexpected expense comes up, or you’re ready to invest in profit-generating growth strategies, you’ll be prepared – and can avoid the risk of debt.

Pay yourself first – even when you think you shouldn’t

Sometimes it may feel like you need to compromise between two priorities: paying yourself and paying all your bills in full.

Continue to pay yourself a minimal salary every month, even when money is tight. Then pay the rest of your bills, putting down as much as you can above the minimal required payment. This strategy will help you build a solid credit rating – so when you apply for a business loan a lender will consider you a good risk.

It’s worth noting that banks, finance companies, and investors regard business owners who pay themselves in a positive light – and are much more likely to want to deal with them.

Financial reward can be a powerful incentive

Many businesses generate revenue, but it typically takes time to see healthy profits. This is another reason it can be difficult to pay yourself first.

Nonetheless, rewarding yourself for your hard work will motivate you to keep working, even if you aren’t able to pay yourself a large salary right away.

Talk to your accountant for a guideline on how much to pay yourself. Always treat yourself as generously as you would your employees.

Reward financial milestones met and projections exceeded with a bonus. Raise your salary when your profit shows continuous growth. If giving yourself a raise creates some anxiety, do it in confidence knowing you can always make adjustments as needed.