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Paying yourself and profit

Yesterday, I wrote about the definition of profit. As a small business owner (that is, a sole trader or partner rather than a company or trust,) how do you get paid – it is an expense or does it come from your profit?

Depending on how you have set things up, it could be either way, or even both.

1. you pay yourself a salary/wage

If you pay yourself regularly as you would any employee, then your pay is an expense – as are the workers compensation, superannuation, PAYG and other employment expenses. Your pay is removed from your turnover before you calculate profit and your profits are in addition to your income.

2. you don’t get paid a salary/wage

If you get money from your business on a less formal arrangement, such as only when there is enough money in the account or as you need it, you take drawings from your investment in the business. Drawings are not counted as an expense so they come out of your profits. The more profitable the business, the more money you can draw upon, but if there is little profit, you can’t access much.

 

Earning dollars to make profit in your businessEither way, your profits are there for use in the business or for you to take as drawings and spend however you wish. The distinction is important in accounting terms for the following types of situations:

  • you are taxed on the profits of your business
  • calculations based on your profits (eg x% of profits as a donation or as rent)
  • applying for financial assistance (loans, etc) and facilities (merchant accounts, etc)
  • division of profits with a partner (if in a partnership)
  • valuations of your business for insurance or selling purposes

How do you get paid from your business? Why do you manage it that way?

Sharing salaries…

It’s one of those questions we don’t usually ask, or answer – how much do you get paid? I’m not going to discuss whether that’s good or bad, or even why it may be the case, but something on the news last night made me think of it.

Apparently, a 16 year old boy was offered a job in the USA for $400,000 a year, which he turned down as he wants to stay here with family and friends. What I find interesting is how everyone found out about it.

I find it hard to believe that the company contacted the media and said “we offered him $400,000” I mean, that sort of announcement can’t be good for them – it shows them being rejected (even if through no fault of theirs) and may cause problems between staff who aren’t being paid $400,000!

I know I’ve had jobs where I didn’t want others knowing my salary – largely because I didn’t want them to get into ‘why does she get that much?’ or ‘but I should get more than him!’

A 16 year old earning so much also makes me wonder about his expectations. I am not making comment on his ability in any way or whether or not he deserves such a salary, but $400,000 is such a lot of money to start a working career with! Where does he go from there?

I see some value in young people starting with small jobs so they learn the value of earning money and getting a realistic view of the working life. It’s not so much the $10 an hour as learning their time is worth something and that it takes time and hard work to increase their pay rate. And learning how to use and  manage that money is also important.