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Entrepreneurs often fail to realize that a business in its growth stage needs all its cash flow to grow the business.

When Greg Quinn started out as an independent commercial interior designer, he used a pretty basic technique to figure out how much money he would make from his business.

"I thought, 'I need $24,000 a year to survive, how much do I need to bill to make ends meet?'"

Since then, his business, X-Design Inc., has grown to a full service firm with 10 employees. The firm's funky restored warehouse space in Toronto's East End shows off its practical yet fun aesthetic, with unique touches such as prominent hanging racks for staff bicycles and school-gym-style bleachers for waiting visitors.

The firm designs office and retail space for businesses relocating or expanding. X-Design has worked with more than 150 clients, and among its completed projects are the head offices of Universal Music Canada.

Greg Quinn has always been the driving force behind X-Design, but it hasn't always been lucrative.

"You're not going to make $100,000 a year right out of the gate," says Mr. Quinn. "You can't just say, 'I'm the CEO, I should make money like a CEO.'"

Like most small business owners, Mr. Quinn's approach to paying himself has become more sophisticated over time.

"What I'm going to 'take out' is part of my budgets and projections. So, for example, if we did $1.6-million in revenue last year, what revenue goal do we have to hit that would allow me to make more? We manipulate those variables and see how it works out. The bottom line is: It's not okay to make $24,000 any more!"

Most small-business experts seem to agree with the essence of Mr. Quinn's approach. But that comes with a caveat – since his business is still growing, it's important he doesn't withdraw too much too soon.

"It's much better to take some chips off the table later," says Dave Cook, a partner in KPMG's enterprise group. The worst time to take significant amounts from your business is when it's growing, he says. "Entrepreneurs often fail to realize that a business in its growth stage needs all its cash flow to grow the business."

Mike Michell, national director of small business at Royal Bank of Canada, is willing to give business owners a little more wiggle room.

"You should ensure you are taking out enough money to support your personal needs," he says. But the company must be able to meet its obligations and "have some additional liquidity to ensure it can meet any unforeseen issues that may arise – such as losing a major client, accounts receivables being delayed, etc."

The guidance of an adviser at a bank or elsewhere can be crucial in this process, Mr. Michell says.

Joe Collura, small business area manager for the Bank of Montreal, points out that income decisions can have tax implications as well.

"Most new small businesses are defined as sole proprietors or partnerships, so the income the entrepreneur receives from the business is considered to be personal income for tax purposes," says Mr. Collura.

Mr. Collura notes there are tax advantages to businesses registering as corporations. "With incorporated business, there are a number of ways an amount may be provided to an applicable individual, including wages, management fees and dividends."

Dave Cook at KPMG says there's an art to making choices that minimize taxes and maximize cash flow. Salaries are deductible for the incorporated company, so it reduces the taxable income of the company, Mr. Cook says.

"An alternative is to pay yourself as a dividend," he says. "It's not deductible for the company, but for the individual it is taxed quite differently – often in quite an advantageous way."

For many successful business owners the problem is being a little too strict with rewarding their own hard work, Mr. Cook says.

"Maybe that's our cautious Canadian personality coming through," he says with a laugh.

Mr. Quinn hasn't made that mistake. But he agrees there can be danger in penalizing yourself.

"The easiest salary to cut is your own," he points out.

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