What should you consider when working out your salary and other drawings? As a franchisee, you should fully understand all the financial aspects of running a business. This includes how you will be paid, how much you will receive, and how you should be drawing these funds. A good accounting package and the assistance of financial and tax experts will help from a planning and monthly maintenance perspective.
Reasonable remuneration as a salary
Franchisees draw a manager’s salary from payroll. This must be included as an expense at the planning stage and decided on when the franchise operation is established. Your salary is an operational expense alongside your rental, franchise royalties, security, cleaning and other staff costs. The final figure will depend on various factors, including the location of your business, industry norms and what is reasonable based on the performance of the franchise. Discuss the matter with your franchisor and other franchisees within the network to help you settle on a number.
Pay yourself regularly, as long as the business can afford to do so. When times are tough, you may be tempted to reduce your salary. But the stress this adds – to you and your family – increases the chance of business failure.
Payment by means of dividends
At the end of the financial year, you can choose to pay yourself a dividend from net profits. Before going this route, consider what percentage of profit may be required for the next financial year. Your growth plans and any investments needed must be budgeted for before you declare a dividend. The legal structure of the business may impact how this is done, as all shareholder requirements must be accommodated.
Before declaring a dividend, make sure that you fully understand the tax implications and charges on the business. Through your dividend, you can pay yourself what you deserve for
your sacrifice, commitment and success.
When not to pay yourself
If the business is really struggling, and a pay cut could mean the difference between survival and failure, salary payments can be deferred. These payments must still be recorded on payroll and can be paid out in the future when the business is back on its feet.
Paying your staff
Incentive schemes are a great way of ensuring that your employees stay focused and committed to helping you grow the business. Setting fair bonus-linked milestones to be reached monthly, quarterly or annually will keep them motivated, and working towards
specific goals. This all contributes to the creation of a competitive work environment that encourages constant improvement.
Any incentive scheme you introduce should not be too costly and all deadlines and milestones must be realistic, and take economic environment and industry norms into
Failing to pay your employees is a sure route to franchise failure. If your business is carrying a lot of debt, you should cut back on personal expenses charged to the business or
on drawing a large salary. This is likely to impress creditors who may want to look at management accounts when negotiating debt repayment.