If data is anything to go by, one of the reasons why people start up small businesses is to “be my own boss” but a lot of people are quick to realize that being the boss, even if only of yourself, is a lot more work than anticipated. You have to manage administrative work, stock up and manage inventory, manage customers, send invoices for payment, handle shipping, drive sales and revenue, and most importantly, get yourself paid.
For small business owners in Nigeria, it’s quite common to notice an irregularity in payment frequency. You pay yourself this month and completely forget to pay yourself next month. One of the possible reasons is that small business owners may not have dedicated bank accounts for their business. So, your personal and business finances are getting mixed up giving you the illusion that you have a lot of money. I hate to break it to you but your business has a lot of money, you, not so much.
4 Tips to paying yourself a salary as a Nigerian Business Owner
- Get your finances in order
If you're a small business owner, your top priority should be ensuring your business remains afloat. If you have been lodging all your expenses on the Kippa App, you only need to take a look at your Profit Analysis report. If you have not, you would need to either hunt down your expenses on your bank account statement or manually go through your petty cash book with a calculator to figure out your profit. However you choose to get this information, It is important that all your operating expenses (including tax) are covered.
The process of figuring out the right salary to pay yourself will take some months of experimentation so keep that in mind. This is because the salary is a recurrent business expenditure dependent on your average business revenue and you’ll need a couple of months to get a good average estimate.
2. Factor In the effort you give your business
Just like any other employee, your salary is a function of how much work you put into the business. When paying yourself, don’t underestimate the work you put into your business. If you are currently running your business alone, you are doing a lot of work and your salary should reflect that. This is not to say that you should overpay yourself but when figuring out a balance, it should be between the effort you put into the business and the revenue the business makes.
Ultimately, this is your business, and the scope of work you would carry out over time would vary. Today you could be an accountant reviewing your Kippa Sales report, while tomorrow you are handling inventory management and sending out invoices on the Kippa App. So if you’re including the scope of work as a factor that dictates your salary (and it should), make sure to account for your scope when you do the calculations.
3. Time for the calculations
Once you have a clear view of your profit on the Kippa Profit Analysis Report, you can begin calculating just how much of your profit should be your salary.
Emergency Fund 20%: Leave 20% of the total profit you make monthly in an emergency fund. This fund would come in handy if your business ever faces bankruptcy
Taxes and Regulations 30%: Your taxes and regulatory requirements may not be up to 30% of your total income but setting healthy financial numbers will help you manage expectations and plan to in case of any future changes.
Reinvestment Fund 20%: You may need to launch new products, improve your branding or increase marketing and advertising. Let’s set aside 20% for that.
Your Salary 30%: Once you have the above cleared, take 30% of the money home as your salary. This way you’re not underpaying yourself (because you’re creating an emergency reserve) or overpaying yourself (because well, you’re creating an emergency reserve!).
4. Pay yourself regularly, you are a staff
After all of the calculations and deductions, it might seem like your salary is not a lot but that’s okay. As your business grows, your salary would increase. Set up a payment schedule and pay yourself monthly. Regular small payments are generally more acceptable and financially responsible than random, unpredictable payments.
When NOT to pay yourself as a Nigerian Small Business Owner
Once you get a system in place, paying yourself regularly is tempting as it is intuitive especially when you can tell from the numbers that your business is growing. But there could be times when you won’t be guaranteed a payment.
Here are a few situations when you should consider not paying yourself: Here are a few
- If you’re struggling with paying your employees
- When there are new regulations affecting your business operations
- When you are recording low sales consecutively for about 3 months
Remember that as your business grows so will your salary, hence it is perfectly okay if your salary at first isn’t what you hoped. The goal is not to suck your business dry so you can get a new iPhone with your first salary. The goal is to pay yourself a reasonable salary to keep you motivated to do the hard work entrepreneurship entails.