Some of the most common mistakes business owners make are money-related. I was on a phone with an entrepreneur friend and he asked how I handle my income as the business owner. “Do you pay yourself a salary or do you make money based on how much the company makes?” he asked.
This was a genuine question because he struggled with handling his income as a business owner. I believe the answer is straightforward. As a business owner, if an order means anything to you, you must take a fixed monthly salary from your business just like every other employee. You should not take money randomly from your business. You will be amazed at the number of business owners who take money randomly from their business.
This was a challenge my friend was facing. He knew the right thing to do was to pay himself a fixed salary, but he was struggling to put this to action. I believe this is one of the common mistakes business owners make. In this video, I will share with you 3 money mistakes you should avoid if you want to get good with your finances and build a successful business. Before we get to it be sure to subscribe to After School TV for more insightful videos like this.
1. Not specifying your income
As a business owner, you can pay yourself a monthly salary, pay a dividend, or both. How you go about it is totally up to you but there are some things you need to keep in mind to avoid costly mistakes.
If you decide to pay yourself a huge salary as the owner, you will have to pay higher taxes because high earned income attracts a higher tax rate. You’ve often heard of a billionaire founder declaring his tax payment and wonder how his tax return is as small as the regular workers. That is business these business owners are smart with money.
They take mid salaries so that they can pay lower taxes. Then they have their business fund their lifestyle as part of the company expenses. And when they do need a large chunk of money, they pay themselves in dividends. Dividends attract lower tax, so this helps them avoid losing a huge chunk of their money to taxation. So before you decide to start paying yourself a huge salary as the owner, remember the tax implication.
A major mistake is taking out money from your business without order. I come from a business-oriented community where almost everyone is a business owner. I have seen indiscipline play out among business owners. They take money from their business without accountability. They have this mindset of, “it is my business. I will do whatever I want with it”. It’s no surprise that most of these businesses didn’t last. At best, instead of growing, they deteriorate into a shadow of the former itself.
The smart thing to do is to take a considerable salary from your business. And only increase your salary accountably. Personally, my salary has remained the same for the past two years. I don’t take dividends from my business more than once a year. In fact, I haven’t paid myself a dividend for the last 18 months.
It helps to see the money your business makes as not your money but your business’ money. You just happen to be the person responsible to manage the resources. So don’t make the mistake of taking a huge salary that does not justify the role your play in the business. And don’t take money randomly from your business simply because you can.
2. Not separating personal account from business account
There are times I need a large sum of money for personal reasons and don’t have the money. But the money is sitting in my company’s bank account. If I don’t have any other option to raise the money, I take the money from my business as a loan and pay back as soon as I can. This helps make the book neat and every inflow and outflow accountable. A dividend is a dividend; a loan is a loan. You shouldn’t take money from your business at random.
However, if your business account is not separate from your company’s account, you cannot keep a clean book. Your accounting will be messy and you will have a terrible record that wouldn’t tell you how your business is doing. This is a very common mistake business owners make; using their personal bank account as their business account.
If you have been making this mistake, go register your company and open a corporate bank account. Then start channeling every transaction through your corporate account. This is an important step to separate yourself from your business. It will help you manage your personal and business finances more efficiently.
3. Taking dividend too quickly
As a business owner, you are entitled to dividend from your business. But you have to be smart with how you take money from your business. Here is what most business owners do. They work hard and struggle in their business for five years. As soon as the business starts closing good deals, instead of reinvest into the business on human capital, marketing and other important areas that will help the business to grow, they want to reward themselves with expensive lifestyle. There lifestyle increases as business keeps coming. After all, they have suffered to get to this point and deserve to pat themselves on the back.
What they fail to understand is that a business needs money to grow. What brought you here may not even keep you here, let alone take you there. The early monies your business make is not for you to finance your lifestyle, it is to reinvest it into your business.
I believe in patting yourself on the back for a job well done. To make a business profitable is tough. So when you pull it through, you desire an accolade. But you have to remember that it was your ability to delay gratification that got you here in the first place. So don’t lose that quality too quickly. Focus on growing your business by reinvesting your profit back into the business. You will have a higher chance of reaping the greater reward in the near future.
How you handle money as an entrepreneur and business owner will go a long way to determine how successful your business will become. It will also determine whether you will build a business that will last or whether you will become a one-night wonder who will only have stories of past glory to tell. I hope you’ll make the smart decision with money.
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