When do I FINALLY get to pay myself? That’s a question most handmade business owners often ask and one that I hear a lot.
Yes, you’ve been working really hard on your handmade or creative biz, the money is starting to roll in, and YES, you deserve to pay yourself.
BUT, before you can figure out when you can finally pay yourself and how much you can pay yourself you need to have a good bookkeeping system in place.
Keeping and having a reliable set of bookkeeping records helps you to determine when and how much you can pay yourself.
I bet you’re wondering…………..
What the heck does bookkeeping have to do with paying myself?
You’re probably thinking that I’m some sort of whacked out number-cruncher who is just trying to convince you that bookkeeping is important (and it is) and that I’m just sort of making up this stuff as I go.
Wrong! (For the most part.) I am admittedly a little whacked out BUT NOT when it comes to the relationship between good bookkeeping records (and habits) and how that relates to paying yourself.
Let me explain…….
Before you can pay yourself, you have to know if your business is making a Profit (money)
First you have to know is IF your handmade or creative business is making money (a Profit or a positive Net Income).
The ONLY way that you know if your business is making money, is IF you have good bookkeeping records.
Logging into your online bank account and seeing that there is money in your account isn’t enough!
A gentle reminder, NET INCOME is calculated by:
- Gross sales or income – the money you bring in from selling whatever it is that you sell
- MINUS – Cost of Goods sold (what it cost you to make the finished item, product, or service)
- MINUS – Overhead expenses (the things you have to pay for even if you make no sales)
- PLUS – any other income that you receive (commissions, affiliate income, etc.) that has nothing to do with your primary business of selling whatever it is that you sell
- MINUS – any losses on the sale of business assets (most of us probably won’t have that)
- EQUALS – our NET Income (or Loss)
Net Income (or Loss) is the last line on a Profit & Loss Report or an Income Statement as the Tax Professionals like to call it.
So, good bookkeeping records are required.
Once you know how much money you’re business is making, then…..
Well, there is more math…and bookkeeping to do BEFORE you can decide if and how much you can pay yourself.
With your Net Income number in hand – you now need to take the following things into consideration and subtract them out.
- What are my upcoming expenses? Unfortunately we don’t have guaranteed income each month – only guaranteed expenses or things that we have to pay for even if we don’t have any sales. That’s why we need a budget.
- Am I planning on anything in the next 30 days that isn’t in my budget? Maybe some unplanned advertising or a course that you want to take that you hadn’t planned on?
- How much of a “cushion” do I need to leave in my business? This one is an entirely personal thing.
- What amounts do I have to set aside for self-employment and sales tax? Remember, the tax man ALWAYS comes first.
This will leave you with a bottom line number (as of a specific point in time) that you have to work with and this is the amount that you CAN pay yourself – taking it as an Owner’s Draw for a Sole Proprietorship or a Single Member LLC.
Lastly, you have to look at your bank balance – do you REALLY have the money in your account?
Some things to remember about how and when to pay yourself:
- An Owner’s Draw goes on your Balance Sheet and is part of Owner’s Equity.
- Money that you pay yourself (take out of the business as an Owner’s Draw) is NOT an Expense and is NOT recorded on your Profit & Loss Report (or Income Statement).
- If you have money rolling in on a steady basis but find that your business isn’t making a profit – then you need to take a LONG, HARD look at how much money you are spending.
- If you don’t have a budget – YOU NEED ONE!
- You may need to calculate or recalculate your Fair Hourly Wage.
I know this doesn’t answer the WHEN can I pay myself question, but it should help you to determine the HOW to figure out the math that’s involved.
The rest is up to you. Once a month, once every 3 months, once every 6 months, once a year.
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Until next time, Happy Creativity!