Once your business has been around for a while, if you manage it right, you will build a big bank account. Deciding how much to pay yourself and how much cash to keep on hand is a tough decision, and finding the right balance is vital for the long-run success of your company.
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Cash Needs
The first place to look is the cash needs of your day-to-day operations. If you look at your financial records for the last six months, you should be able to come up with a quick average of all of your expenses per month.
I suggest keeping at least 3-6 months of expenses in cash on hand at any given time. That will help you through a rough patch and keep your business operations smooth. If you are very conservative, you could increase that to a year or more.
Emergency Fund
Just like in your personal finances, you should have savings for an emergency should one arise. You never know when your computer will crash, your truck will die, or one of an endless list of problems will surface.
To ensure you can handle any major emergencies, you should pad your operating cash on hand with an additional 3-6 months of expenses. To be more accurate, you can take a look at your operations and identify any major expenses that might arise, no matter how remote.
You could be insured against many problems, and your business may not be capital intensive. However, you should be prepared to keep your business operating even if a major expense occurs.
Paying Yourself – Salary or Leftovers
The biggest question when deciding how much cash to keep in your business accounts is a factor of paying yourself. Ideally, you have a healthy business that generates plenty of revenue and profit. If you have a healthy company, you need to decide what to do with the profit.
Some business owners simply pay themselves from the profit of the business. That means your paycheck will fluctuate when you are paying yourself. This payment method often brings the most cash out of the business.
Others pay themselves a regular salary and pay themselves excess profits as a “dividend” or “owner draw” on a regular interval. I am a much bigger fan of this payment method, as it gives your business and your personal finances a more consistent cash flow.
How to Decide?
At the end of the day, all of your cash flow and budgeting decisions are up to you. Each business is different and there is no solution that is perfect for everyone. Do research, keep a budget, and monitor your income and expenses to decide how much cash you should keep on hand and how to pay yourself.
About Carson Derrow
I usually keep a month worth of living expenses, which is really low, but have not needed more so far, and in case of an emergency I know I can resort to my parents or a 0% credit card.