Are you curious about how, when, and how much to pay yourself as a digital marketing agency owner? Well, we’ll cover the right way, what not to do, and how much.
I get these questions from agency owners all the time:
- Should I take a salary or distribution?
- Should I pay myself based on revenue or profit?
- How do I pay myself just enough so the agency doesn’t run out of money?
- How to increase my salary?
- How much to set aside for taxes?
- How do I recoup my investment for starting up the agency?
Before diving deep into the above – I highly recommend using an accounting software to manage finances for your agency. It is very important to know where your agency stands (financially) before paying yourself. The fastest way to do that is to do your books in accounting software like QuickBooks Online, Wave, Xero, etc.,
Considerations
- Consider your current financial position
I want you to grab a paper & a pen for this. You need to estimate what your MRR is. This is going to tell you how much money is coming in each month. Then you need to write out all your current monthly expenses – be it VAs, Vendors, or Subscriptions. You should note down both your monthly income and expenses. You can only pay yourself what is left over. Let’s say your MRR is $10,000 a month. And your expenses amount to $7000.
$10,000 minus $7,000 = $3,000
You now have $3,000 to work with. Your monthly salary cannot exceed $3,000 unless you close more clients or you cut expenses. Another consideration is Churn. If a $1,000 worth of monthly retainer client cancels – now you have $9,000 mins $7,000 = $2,0000.
Update these calculations based on clients coming in or going out.
- Consider market wage for someone having your skillset and expertise.
If the market would pay you $5,000 a month as an employee, then ideally the business should also be able to pay you $5,000 a month.
However, it’s not a perfect world. Most agencies at the start cannot afford to pay the founders their market wage. So initially you will have to compromise (the joys of being a business owner).
- Setting aside a reserve fund or tax fund
Most agency owners make the mistake of not setting aside funds when they can. Your first goal as soon as business is afloat, is to set aside money for a rainy day. You need to build up an emergency reserve of at least 1 month’s worth of expenses after which you can start paying yourself.
Another problem agency owners face is the shocking tax bill at the end of the year. Plan ahead and as a general rule of thumb, set aside 30% of profits for taxes. You should have 3 separate bank accounts – Savings, Operations, and Taxes.
- Another important consideration is start up cost. How much did you invest out of your pocket when starting the agency? Before you can pay yourself a salary – you need to recoup your investment in the agency.
Once you’ve gone through all the considerations you can start paying yourself. The key is to start transferring a small amount each month/week to your account. After each transfer, you need to monitor its impact on the agency’s finances. Are you still able to pay all the business bills after paying yourself? Are you setting aside emergency/tax funds before paying yourself? If the answer to both questions is yes, BI Consultancy suggests trying to pay yourself a bit higher in the next cycle. It is better to start low and gradually increase your compensation rather than starting high and having to cut later on.
FAQ’s From Earlier
- Should I take a salary or distribution?
A salary provides consistent income and is subject to payroll taxes, whereas distributions, typically for LLCs or S-Corps, offer tax advantages but should only be taken if the business has adequate profits
- Should I pay myself based on revenue or profit?
Paying yourself based on profit ensures you’re only taking what the business can afford after expenses, helping maintain financial stability. Basing your pay on revenue can be risky, as it doesn’t account for the actual costs of running the agency.
- How do I pay myself just enough so the agency doesn’t run out of money?
To ensure your agency doesn’t run out of money, pay yourself a reasonable amount that aligns with the agency’s cash flow and profitability (as discussed earlier in this article). Regularly assess your business’s financial health and adjust your pay to balance personal income with reinvestment needs.
- How to increase my salary?
To increase your salary, focus on growing your agency’s profitability by acquiring new clients, optimizing services, and reducing unnecessary costs. As profits rise, you can gradually raise your salary without straining the business’s financial health.
- How much to set aside for taxes?
Set aside 30% of profits. Use a Profit and Loss statement to determine your actual profits for the month.
- How do I recoup my investment for starting up the agency?
To recoup your initial investment, set aside a portion of the agency’s profits each month specifically for repayment. Prioritize stable cash flow and profitability, allowing you to gradually recover your startup costs.
Also Read: Cash Flow in Your Digital Marketing Agency
