Paying yourself from your business is one of the greatest milestones a business can have. Starting a business and watching money comes into the business is great. But at some point, you’d like some of that money to end up in your own bank account.
Anyone who’s actually built a business knows this is the greatest challenge of the business and it is not a straightforward path. Trying to achieve this feat, I’m sure you’ve pondered over the following questions:
- Am I paying myself too early?
- When is it too long to wait to pay myself?
- Do I have enough to pay myself consistently?
- What happens if I can no longer pay myself with the business?
- Will the CRA care how I do this?
These questions are normal. Thankfully, there are metrics you can look at to guide you through the appropriate time to pay yourself. In this blog, you will see the five core financial metrics that genuinely help you figure out when it’s safe and smart to start paying yourself from your business in Canada. And yes, I’m talking about practical things that real business owners actually use. Nothing theoretical or in a corporate finance textbook.
Let’s get into it.
Why Paying Yourself the Right Way Actually Matters
Before we talk metrics, let’s discuss why paying yourself the right way actually matters. Paying yourself isn’t selfish or irresponsible. It’s actually a core part of running a healthy business. If your business never ends up paying you a healthy salary or dividend, you will eventually resent the business or burn out. If you pay yourself too soon, the business can break under pressure due to insufficient cash flow. The timing needs to be just right. That being said, the end goal of paying yourself isn’t about perfection. It’s balance. Balance for your business to thrive while you can also enjoy life outside your business.
There are also the many different forms of payments Canadian entrepreneurs can utilize to pay themselves. These include: payroll accounts or dividend payouts. On top of that, there are CRA rules that businesses must abide by include those about shareholder loans, and EI that you can’t usually opt into unless you’re incorporated and sign up voluntarily. Careful planning is needed to ensure how you pay yourself empower you rather than overwhelm you.
These are the reasons this decision shouldn’t be taken lightly. In the following sections, we will discuss 5 metrics to look at that will help you decide when to pay yourself for your business in Canada.
1. Consistent Monthly Revenue: The First Sign Your Business Can Support You
If your business income rises and falls like a roller coaster, you should probably put a pause on paying yourself. One good month can trick you into thinking you’re stable. Then, one slow month can put you right back into panic mode. This is why revenue consistency is the first metric worth examining. Let’s look at how to track consistent monthly revenue for your business,
Find Your 3-to-6 Month Revenue Average
A good first way is to look at your 3-to-6 month revenue average. To do this, take your total revenue for the past three months. Add it up and divide by three. Do the same for the past six months. If both numbers are reasonably close, that’s your first sign of stability. It doesn’t have to be perfect but close.
Do this over a few other periods. Once you see that your revenue isn’t bouncing all over the place, you can start to estimate what you could safely withdraw each month without jeopardizing cash flow for your business. Think of it as checking the heartbeat of your business.
Why This Matters for Paying Yourself
Let’s look at an example of this in real time. Let’s say your average revenue is $8,000 a month. Some months hit $12,000 and others fall to $3,500. Say you choose to pay yourself a flat rate of $4,000. In this case, this can be really risky. However, if you’re consistently between $7,000 and $9,000 every month, paying yourself $4,000 is not a bad idea. Predictability creates breathing room.
It’s important to be honest with yourself about the numbers. Revenue consistency isn’t about optimism. It’s about giving yourself enough truth to make smart choices.
2. Profit Margin: What’s Left After Everything Else Gets Paid
Revenue tells you how much is coming in. But a more important metric is your profit margin. This tells you how much actually stays. You cannot pay yourself from money that’s already committed to something else. Profit is where your paycheck lives. This next section is going to involve a little math but it’s nothing you cannot handle.
Calculate Your Net Profit Margin
In order to calculate your net profit margin, take your total profit (not revenue) for a period and divide it by revenue. Multiply by 100. That percentage is your net profit margin.
A simple example.
Lets look at a simple example to see how to utilize profit margins to pay yourself.
Revenue: $20,000
minus Expenses: $14,000
equals Profit: $6,000
Profit Margin = 6000/20,000 = 0.30 = 30%.
If your profit margin is healthy enough, it means there’s real space to pay yourself without hurting operations. If your profit margin is thin, every dollar is already working overtime.
What This Means for Paying Yourself
Someone running a business with a 10 percent margin needs to think differently from someone at 40 percent. Low margins does not mean your business is failing and you cannot pay yourself. It just requires a slower, more cautious approach to personal compensation.
A good rule of thumb for many small Canadian businesses is a profit margin over 20 percent. This rule is not set in stone as different industries may require different margins. Restaurants for example, run lean profit margins. For them, seeing a profit margin less than 20% can be common. This does not mean a salary cannot be achieved. Rather, it just requires caution when taking the salary. Consulting businesses on the other hand often run fat and will frequently see profit margins of over 20%. Trade businesses have profit margins that can fluctuate often.
When using profit margins to see if you can pay yourself, it is important to not cling to an arbitrary number. Instead, look at the overall pattern of your business. While profit margin is a great indicator to use to pay yourself, it will vary from between industries and individual business. Knowing this will give you clarity on where to use it.
3. Cash Flow Stability: The Metric No One Loves but Everyone Needs
Cash flow is another important metric to use if you want to know when to pay yourself. It is not the same as profit. And this little detail is where business owners get tripped up. Your business can be profitable on paper and still not have enough cash to pay yourself. Why? Because it is greatly affected by the timing in which bills are paid and money is received from expenses. A few things can affect cash flow. These include:
- Client late payments
- Purchase of inventory in big chunks.
- A large amount of unexpected software subscriptions hit your bank at once.
All of these case can greatly affect the amount of money in your bank to pay yourself.
Monitor Your Operating Cash Flow
To figure out if your cash flow supports paying yourself, you want to look at your operating cash flow for at least three months. If your cash flow dips into the negative regularly, paying yourself creates strain. If it stays consistently positive, more often than not, you’ve got room.
Here’s the Thing About Cash Flow
Cash flow is the most human part of bookkeeping. It tells you what’s really going on beneath the tidy spreadsheets and pretty dashboards. If you’re constantly dipping into your personal account to float the business, that’s your cash flow screaming at you. It’s saying: please chill, don’t start payroll yet.
But if the business is regularly covering its own bills and holding a healthy bank balance at the end of each month, now we’re talking.
4. Emergency Reserves: The Financial Cushion Your Future Self Will Thank You For
Another metric to use to know when to pay yourself from your business is emergency reserves. Most people don’t think of this metric because it’s boring. However, it’s probably the one that saves you and the business the most stress. Before you pay yourself reliably, your business needs a reliable cushion for rainy days – an emergency cash reserve. Something to hold your business up in unforeseen circumstances.
How Much Should Your Business Have Saved
A common question with having an emergency reserve is knowing how much your business should save. There’s no universal law, but most Canadian accountants suggest one to three months of operating expenses. Some even say six months if your industry is volatile. Think about it this way. If your monthly expenses are $10,000, then your emergency reserve target should be anywhere from $10,000 to $30,000.
When that reserve is funded, paying yourself feels safe instead of terrifying.
Why This Matters More Than You Think
Imagine you decide to start paying yourself $3,000 a month. Everything seems fine. Then your insurance renewal hits, or your contractor invoice doubles because the job took longer, or your POS machine breaks, or some random software fee you forgot about sneaks up on you.
If you didn’t have reserves, you now have two problems: an unexpected bill and payroll you can’t reverse. If you have a cushion, you shrug, pay it, and keep moving.
A business without reserves feels like a house with cracks in the foundation. It might stand for years, but one weird storm could change everything.
5. Owner’s Role and Replacement Cost: What It Would Cost to Hire Someone to Do What You Do
This metric is the one most business owners never even think about, yet it’s one of the clearest. If you weren’t doing your own job, what would you have to pay someone else to do it. That cost is a powerful indicator of how much you should eventually pay yourself.
Estimate the Replacement Cost of Your Work
Say you run a small landscaping company. If you had to hire someone to run operations, manage clients, handle scheduling, and take on some of the labour, maybe that would cost $60,000 to $80,000 a year.
Or maybe you’re a designer. If you weren’t designing, you’d hire a designer at $35 to $45 an hour.
The point isn’t to match the number exactly. It’s to understand the economic value of your labour inside your business.
What This Means for Paying Yourself
If your business can’t afford to replace you, then it probably can’t afford to pay you reliably yet. That’s the blunt truth. If it can afford to replace you, then it can probably afford to pay you at least part of that amount now.
This metric forces you to look at your business objectively instead of emotionally. And that objectivity is what keeps your compensation grounded in reality.
So When Should You Actually Pay Yourself. Let’s Put It All Together
You’re ready to pay yourself if these five things are true:
- Business revenue is consistent enough that you can predict the next few months.
- Your profit margin leaves extra room after bills are paid.
- Cash flow stays positive most months.
- Your emergency reserve gives you breathing room.
- The business could afford to replace your labour at least partially.
If you meet all five metrics, and your business makes enough, you can start thinking about paying yourself. If you meet three or four, you might want to start smaller payments, like a modest monthly transfer or quarterly draws. For fewer than three metrics, your business probably isn’t ready yet, but the good news is now you know exactly what to work on.
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How to Actually Pay Yourself in Canada: Salary vs Dividend vs Owner’s Draw
In Canada, there are three main ways to pay yourself. These include paying yourself a salary, dividend or owner’s draw.
Paying Yourself in a Sole Proprietorship
As a sole proprietor, you don’t take a salary. You take owner’s draws. It’s simple. There’s no payroll setup. Your tax is based on net business income. The profit you make from your business is concerned your pay.
Paying Yourself in a Corporation
For corporations, you can choose to pay yourself a salary or dividends or a mix of both. Salary gives you RRSP room and is deductible to the corporation. Dividends are taxed differently and often used when the corporation has strong profit. A mix gives flexibility.
This isn’t a tax strategy deep dive, but at least now you have a starting point on how to pay yourself if you so choose.
A Quick Reality Check: Your First Paycheque Doesn’t Have to Be Big
Most entrepreneurs think their first payment should reflect what they want to earn. That’s not necessarily true. Your first payment should reflect what the business can handle. You can always increase it later. Think of it like turning on a tap slowly instead of blasting it open.
A lot of business owners start with $500 a month. Or even $1,000 per month Sometimes, it’s whatever fits the metrics we talked about. Nothing magical happens the moment you start paying yourself. No alarms go off. Your accountant doesn’t faint. The CRA doesn’t send a letter.
Paying yourself is part of your business maturing. That’s all.
The Final Word: Use the Metrics, Not Guesswork
Inconclusion, here’s what this all comes down to. Paying yourself shouldn’t be a guessing game. You don’t have to wait for your business to “feel” ready. Instead, use the metrics we discussed to gage when it is time to pay yourself. When your revenue is steady, your profit is healthy, your cash flow is positive, your reserves are funded, and your role has real economic value, you’ve earned yourself a paycheque.
And if you’re not there yet, it’s okay. At you know what to fix to get your business on the right track to pay yourself.