Are you earning Enough?

As a business owner you should be earning more than an employee, or what you could earn as an employee of someone else’s business.  This premium compensates you for the extra risk and demanding work that as a business owner you have.

Most business owners experience  income fluctuations year to year,  have invested significant funds and/or taken business loans or other debt to fund the business and work longer hours.   Business owners who work in their business  deserve to earn more than an employee would doing the same work.

If this is your first year in business or you are still a fledgling business, chances are your personal  income from the business is also still growing.  Whilst you are doing this, you may not be growing your income, but you are growing your wealth.   Keep at it.   Taking too much profit from the business as personal income can limit your business success, and future earnings.  Retaining some profits is important.  This is need to fund future growth, trading and to  invest or replace  business assets that generate income.  Keeping reserves for difficult years and future opportunities is vital.

If you are an “established” business and have been trading for a few years your business should be generating enough profit to fund future growth AND compensate you for your hard work, and the business risk you have assumed.

As a business owner, your taxable income is not necessarily reflective of the actual benefit you receive from your business.   Comparing your taxable income against an employee salary is not comparing like with like.   Many business owners receive benefits that as an employee they would not receive.   For example, a fully paid motor vehicle, home office allowance and other benefits.

How to compare your self-employed income to what you would earn as an employee?

Firstly,  identify the hourly wage that you would receive, if you were an employee.  Have a look at local salaries for jobs that you are qualified for and that are like the work you are currently doing.  Then identify the hourly rate for this job by dividing the salary/weeks/hours worked.

Are you working the same hours as an employee would?

Track the hours you spend working to find a weekly average.  There is no doubt, that being a business owner involves  more responsibilities than an employee and that work often falls outside of the typical 9-5 working week.  However, when you’re self employed there is also less accountability for your time.  Long lunch breaks, running personal errands during work hours and sometimes catching up with friends and family might “interrupt” your working day.

Time flexibility is one of the benefits of being self employed, and allowing this work  /  life balance  can be beneficial for helping you manage the extra stress and responsibilities that being a business owner entails.  Most likely you make up for these interruptions, with extra work in the evenings, weekends and probably during  holidays.   However, these “mini breaks” can lead you to think you work more hours than you do.

How much do you receive from the business?

If you are receiving a salary with PAYE deducted  and take no drawings, not even the odd coffee here or there this is as simple as adding together your salary plus any perks like motor vehicles or other reimbursements.

Sometimes, it can be a little murkier particularly if your business spending is not always 100% business.   If there are items the business pays for, which you would still pay for if you were an employee , these amounts need to be considered also.  Expenses like motor vehicle expenses, phone expenses, home office allowances, entertainment expenses or other “perks”. Add the total value of these, then adjust for  GST and income tax, as an employee would pay for these with after tax dollars.

For instance, if the business pays $100 including GST per month for a cell phone, and you would continue this plan if you did not have the business.  This would equate to $100 x 12 = $1200 after tax  benefit.  To get the before tax equivalent multiply by *130%. To get $1560.  The value of this benefit equates to  roughly $1560 gross earnings.

How much wealth has your business generated?

You have been working hard in your business for a number of years, mostly likely your business would have a sale value.  If the business is steadily growing each year, the asset value of your business is also growing.   If your business could be sold ( in theory) then your hard work is generating an income, and an asset.   Identifying a business value for sale is tricky, and preparing a business for sale should also be planned for.  We can assist with both if this is on the horizon for you, but right now we are just looking for an estimation.

Estimated Business Value  – Assets – Liabilities

Step 1 – Assets market value :   Estimate how much you could sell your business for, all it is assets, the stock and any good will.  Not every business can sell goodwill, goodwill is your branding, reputation and customer base.    This amount may differ from your balance sheet as it is based on current market value.

Step 2 – Liabilities :  Subtract from your estimated  Sale Value in step one, any funds required  to pay of all of the business bills and debt, including any funds you have advanced the business.

How much would you be left with?

This is your capital gain, the wealth you have created by building your business.    If this is the first time you have completed this estimation, divide this value by the number of years you’ve been in business to identify an equivalent annual “salary”.  In future years, you will use the movement, how much your business has increased in value.

How does your salary compare?

Add together your taxable income, the gross value of benefits and your annual increase in wealth to identify your  “employee equivalent” salary or income for the year.  Now identify the equivalent hourly rate.  Salary/working weeks/average hours worked.

How do your earnings compare with an employee and/or your personal income expectations?   If you have found that you are well rewarded for your efforts, you have great work life balance and you love what you do.  Keep up the excellent work, you’ve nailing business and financial success.

If you have worked through this exercise and found there is a gap.  Pat yourself on the back for taking the time to identify the gap and use this as your catalyst for change.   Read our Kickstart your New Financial Year article or contact us for a FREE Proactive Accounting Meeting