Date 15th June 2018
In this blog series I will look at how you can make your business bottom line healthier.
Please read section 1 of this post available here before continuing with this post.
The action steps last week was to open a second business bank account for the business.
Also you should know the amount of tax you paid from your last tax return.
How to determine you can pay yourself?
Currently you should have an understanding of what expenses you can get rid off from your business. With the unnecessary fat trimmed. Your business is about to start functioning on efficiency.
You should also know the ball park figure of tax due by comparing last year’s tax liability to your forecasts for this year.
It is now time to pay your wages. As business owners we view ourselves as the bottom of the paying hierarchy, putting the needs of others before your own. That has to stop, who can survive on crumbs, now the unnecessary expenses are gone from the business it’s time to eat.
If you are the only worker in your business you can expect to get the majority of the sale. Up to 50% this will leave 20% for Taxes, and 30% for operational expenses.
This may not be viable for you currently so we start slow. See what wages you are currently taking form the business.
Example 1 your current
Drawings for 6 month €5,000, sales for the 6 months was €40,000
Based on current ratio you are getting 12.5% wages form the sales.
Taxes estimate are 25% you should have allocated in to the second Tax account.
This means 62.5% of sales are been spend business expenses.
Example 2 expenses trimmed and a wages % determined.
Drawings for 6 month are now €15,000 of sales for the 6 months €40,000
Based on current ratio you are getting 37.5% wages on sales. The goal is to increase this percentage each month by reducing the costs, until you get to a level where you have 50% of the sales or can live comfortable on the wages taken out.
Taxes estimate are still at 25%, you should have allocated these to the second Tax bank account.
This means you have 37.5% of sales to spend on the business expenses.
What if you employ staff?
The percentage of what you can take in wages must reduce as you employ more staff, as with the 50% example above; you were the most important staff member in the business. Now you have offloaded some of this responsibility to someone else. This should result in the owner taking less of a percentage as more staff is employed.
Hiring additional staff should result in additional revenues.
Example 3 reducing your wage %
No staff = Owner get 50% of sales €100,000 or €50,000 per year.
1 Staff = Owner get 40% of sales or €150,000 or €60,000 per year.
2 Staff = Owner gets 30% of sales of €250,000 or €75,000 per year.
The more you work on your business rather than in your business the less of a percentage you can take in direct wages.
This is not an exact solution as each business is different, you must determine the industry you operate in, your personal lifestyle, and ability to monitor and control expenses. As well as where your business is positioned in its business life cycle.
Next week in Part 3 we will be looking at how to make a profit on every sale you make so you can know how profitable your business is rather than waiting for the final accounts to tell you.
I hope you have been able to get some benefit from this post. If you have a questions be sure to get in touch.