How Much Should You Actually Pay Yourself?

One of the strangest things about running a business is that you can spend years trying to make money without ever deciding how much of it you are actually supposed to take home.

Founders are often remarkably good at paying everyone else first. Employees get paid. Suppliers get paid. The tax bill gets paid. The accountant gets paid. The software subscriptions get paid.

Then the founder looks at what is left and thinks: I will take something out later. Later has a habit of never arriving.

There is an equally common version at the other end of the scale. The business makes a bit of money and the owner immediately starts treating the company bank account like a personal current account.

New car. Holidays. Restaurant bills. Random expenses that somehow become “business costs”.

Both approaches can cause problems. So how much should a business owner actually pay themselves?

There is not a magic number. It depends on the business, the owner’s circumstances, the company’s profitability and what the business needs the money for.

But there is a useful principle: pay yourself properly, but do not confuse the business with your wallet.

For an owner-manager, salary is compensation for doing a job. Profit is the return for owning the business. Those are different things.

If you are running a company every day, you should be able to afford a reasonable salary for the work you are actually doing. The business should not pretend your labour is free simply because you own it.

Otherwise the accounts can look healthier than they really are. A company that only makes a profit because the founder works 60 hours a week for almost nothing is not necessarily as profitable as it appears.

But salary is not the only way an owner benefits. There may be dividends. There may be retained profit that increases the value of the company. There may eventually be a sale.

This is where founders can get themselves into trouble.

They either take too much money out too early, leaving the company permanently short of cash, or they take too little and convince themselves that reinvesting everything is automatically virtuous.

It is not. A business exists to create value. That value does not have to stay inside the company forever.

The question is whether taking money out today makes the business weaker tomorrow.

Imagine a company has £200,000 sitting in the bank. It sounds like a lot. But perhaps £100,000 is needed for upcoming tax. Another £50,000 is required to fund a major contract. Customers pay slowly. The business has three new employees starting next month.

Suddenly that £200,000 is not really spare cash. It is working capital.

This is why looking at the bank balance alone can be dangerous.

The opposite is true too. A business sitting on hundreds of thousands of pounds indefinitely while the owner pays themselves a tiny salary and works every waking hour is not necessarily demonstrating admirable discipline.

It might simply mean the owner has not worked out what the money is for.

There is also a psychological problem. Some founders become obsessed with the idea that taking money out of the business means they are not committed enough.

They wear low pay as a badge of honour. But nobody gets extra points for being broke.

If you have built a profitable company, paying yourself is not a failure. It is one of the reasons you built the company.

The trick is separating reward from recklessness.

Set a sensible salary. Understand the company’s cash requirements. Keep proper reserves. Know what investment is genuinely needed. Then decide what profit can reasonably come out of the business.

And review it. Because the right answer when you are turning over £300,000 is unlikely to be the right answer when you are turning over £3m.

There is one final test that is particularly useful. Ask yourself whether you would be happy with the arrangement if you were not the owner.

Would you think the salary was fair for the job? Would you think the business was being run responsibly? Would you understand why the profits were being retained?

If the answer is no, something probably needs changing.

Running a business is not supposed to mean keeping yourself permanently at the bottom of the list. But it also does not mean emptying the bank account whenever things go well.

The business needs money. So do you.

Good business owners learn to make sure both are looked after.