As a business owner, you are probably wondering why you need to pay yourself. I mean “all the money in this business belongs to me, so why do I need to learn how to specially pay myself?”
Paying yourself forces you to look at the numbers and plan ahead. Of course, you can always increase your earnings, as the business earnings grow. You are the CEO, feel free to promote yourself from time to time as the business makes more money.
There are two very simple ways to pay yourself:
1. Monthly salary
Monthly salary, as the name suggests, refers to taking out a fixed amount every month as your salary, as the CEO of the business. As employees get paid, you also get paid.
Drawings refer to taking out a bulk amount from the business at some irregular intervals. Imagine that as a business owner, once every year you take a drawing of Ksh.1 million to invest in a personal capital project, that’s a drawing.
Many business owners prefer to compensate themselves with drawings than salaries – because they are able to channel that bulk fund into huge family or capital projects.
Drawings may represent either profit generated by the business, or funds which the owner previously contributed, to operate the company. Drawings may also be a combination of profits and capital contributed. Whichever option you chose, drawings or monthly salaries, both methods constitute monies that the business owner has paid to himself and are taxable in the eyes of the taxman.
You may decide to use one of these methods, or a combination of both. Our advice is that a business owner deploys a combination of both methods – salary and drawings. They each have their advantages and work well if both are combined.
Salary allows the business owner to have some decent cash to run his daily life, while drawings allow the business owner to make huge personal investments. Everyone needs to have a balance of both kinds of earnings.