How much can I pay myself from my business? A check you can run in Xero

Most owners pay themselves whatever is left in the bank at the end of the month, then worry when a big bill or a tax payment lands. A better answer takes about fifteen minutes in Xero and comes from three numbers: what the business really earns, what it has to keep back, and how much cash it needs as a cushion.

This guide is about the amount, not the method. Whether you take drawings, a salary, dividends or a mix depends on how your business is set up and where you are, and the tax treatment differs for each. Ask your accountant about the method; use the steps below to decide how much the business can afford. If you run a company and pay dividends, also check your retained earnings: a dividend has to come out of profit the company has kept, not just out of cash. In a UK company, money you take before a salary or dividend covers it builds up in your director’s loan account, which has its own tax charge if it is still overdrawn nine months after the year end. In an Australian Pty Ltd the equivalent rules are Division 7A.

Menu names move between Xero releases and differ slightly by region, so if a label below does not match your screen, search Xero Central for the report name.

The short version

What you can take out each month, on an ongoing basis, is roughly:

average monthly profit, minus tax to put aside, minus cash costs that are not in profit (loan repayments, equipment, stock you are building up)

On top of that, if the bank holds more than the cushion you want to keep, the extra can come out as a one-off. If it holds less, pay yourself less until the cushion is back.

Step 1: find what the business really earns

Run the Profit and Loss report (under Reports) for the last 12 months, not just last month. One good or bad month says little; a year shows the seasons. Divide the net profit by 12 for a monthly average.

Two things to check before you trust that number:

• Is your own pay already in it? If you are paid a salary through payroll, it is usually an expense, so the profit is what is left after paying you. If you take drawings as a sole trader or partner, they are not an expense and do not appear in the Profit and Loss at all: profit is what is available before you pay yourself. Your accountant can tell you which applies. A UK sole trader is taxed on their trading profit, which starts from this net profit, whatever they draw. The total the business earns for you as its working owner, salary included, is its seller’s discretionary earnings: the figure a buyer would start from.
• Is it up to date? Unreconciled bank lines, missing bills or invoices not yet entered all make profit look better or worse than it is. Reconcile first.

Step 2: put tax aside first

Profit is before income tax (and, for a company, before company tax). Money for tax is not yours to spend, even though it sits in the business account until the bill arrives. Ask your accountant what share of profit to set aside (how much to set aside for tax shows how to work it out from last year’s bill), and take it off the monthly average before anything else. Many owners move it into a separate savings account each month so it cannot be spent by accident. (In Australia, if you also get a Centrelink payment, your business profit counts as income there too, with fewer deductions allowed: see the Centrelink profit and loss statement guide, and the Centrelink profit and loss calculator for the fortnightly figure.)

Sales tax (GST or VAT) is the same: it is collected for the tax office, not earned. It is not in profit, but it is in the bank balance, so it matters for the cushion in step 4.

Step 3: take off cash that leaves without touching profit

Some money leaves the bank without ever showing as an expense in the Profit and Loss:

Cash out	Why it is not in profit	Where to see it in Xero
Loan repayments (the principal)	Only the interest is an expense; the rest reduces the loan	Balance Sheet: the loan balance going down
New equipment or vehicles	Recorded as an asset, then depreciated slowly	Balance Sheet: fixed assets going up
Stock you are building up	Counted as an expense only when it is sold	Balance Sheet: inventory going up
Customers paying more slowly	The sale is profit now; the cash comes later	Aged Receivables report

The Balance Sheet with a comparison column for a year ago shows the first three at a glance. If customers are paying more slowly, the who owes me money guide shows how to find who to chase. Profit in Xero but no cash in the bank walks through all of these in more detail. The Statement of Cash Flows shows whether cash from trading covers loan repayments and drawings.

Step 4: decide how much cash to keep

The cushion is what stops a slow month, a late customer or a surprise bill from becoming a crisis. A common rule of thumb is two to three months of normal running costs, more if your sales are seasonal or lumpy. Your running costs are the monthly expenses in the Profit and Loss (plus cost of sales), not counting depreciation. To pick your own number of months, see how many months of cash should a business have?

Then look at what is coming up. In Bills to pay (under Business, or Purchases in some versions), the Awaiting payment tab shows bills you have entered and when they are due. Add the next tax or GST/VAT payment you know about. The cushion should still be there after those are paid.

The free cash runway calculator turns your bank balance and monthly costs into how many months the cash lasts, which is a quick way to see whether you are above or below the cushion.

A worked example

A small services business, over the last 12 months:

Line	Amount
Net profit for the year (owner takes drawings, so not in profit)	$96,000
Monthly average profit	$8,000
Set aside for tax (say the accountant suggests 25%)	−$2,000
Loan principal repaid each month	−$1,000
What can come out each month, ongoing	$5,000

The rate here is only for the example; use what your accountant gives you. To run the same sum on your own year, the free net profit calculator takes your sales, costs, tax, drawings or dividends and loan principal, and shows how much of the profit stays in the business, flagging when what you take out is more than the profit. If you pay yourself a fixed share of every deposit (the Profit First method), the Profit First calculator shows the share your figures support today against the published targets.

If $5,000 a month is less than you would earn doing the same work for someone else, the business is not yet paying you a full wage. True profit shows how to compare the two and what is left once your time and money are paid for. If you sell your time, the charge-out rate calculator works back from the wage you want to the hourly rate that pays it.

The business spends about $25,000 a month to run, so a two-month cushion is $50,000. The bank holds $62,000 today, and $12,000 of that is GST and tax already owed and due next month, so the money that is really there is $50,000. That is exactly the cushion, so there is nothing extra to take as a one-off this month: the owner sticks to $5,000 a month and looks again next quarter.

If the owner wants $7,000 a month instead, the business needs about $2,000 a month more profit. The free break-even calculator shows how much more it would need to sell at its current margin to cover a target profit like that.

What to check every month

• Profit trend. If the last three months are clearly below the 12-month average, the ongoing amount should come down too.
• Cash against the cushion. Above it, there is room for a one-off. Below it, take less until it recovers.
• Bills due soon. Make sure the next two weeks of bills are covered before money comes out.
• Who owes you. A large overdue invoice is cash you have earned but cannot take out yet.

Common questions

What percentage of profit should I pay myself? There is no fixed share that suits every business. Work it out from your own numbers: average monthly profit, minus the tax your accountant says to set aside, minus loan principal and other cash that leaves without touching profit. In the worked example above that comes to $5,000 of an $8,000 monthly profit, just over 60%, but a business repaying a bigger loan or building up stock would take less.

Are drawings an expense in Xero? No. Drawings by a sole trader or partner are recorded against an owner drawings account under Equity in Xero’s chart of accounts, so they do not reduce profit or the tax on it. That is why the Profit and Loss can show a healthy profit while the bank keeps falling: the drawings show up on the Balance Sheet, not in profit. Owner drawings in Xero shows how to record them and the mistakes to avoid.

How do I record paying myself in Xero? For drawings, record the bank payment (Spend Money, or match the bank line when you reconcile) against the owner drawings account. A salary goes through payroll as wages, and dividends go to an equity account (how to pay dividends, and record them in Xero); a UK company director usually takes both (salary vs dividends). The right method depends on how the business is set up, so ask your accountant once and then do it the same way every month.

Why can’t I pay myself when Xero shows a profit? Because profit is not cash. Tax put aside, loan repayments, new equipment, stock and customers who have not paid yet all take cash without reducing profit. Profit in Xero but no cash in the bank shows how to find which of these is holding the cash.

How often should I change what I pay myself? Keep a steady monthly amount and review it every quarter against the 12-month profit. Take a one-off extra only when the bank is above your cushion after the bills and tax due soon. If profit has been below the average for three months, lower the monthly amount rather than waiting for the cushion to run down.

Getting the numbers every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday. It shows last month’s sales and profit against the month before, any notable move in gross margin, and cash in the bank. When cash has fallen in two of the last three months it says how long the cash lasts at that pace, it flags when bills due in the next 14 days are more than the cash in the bank, and it names the biggest overdue customers. It does not work out tax or tell you what to pay yourself; it gives you the figures for this check without running the reports. It asks Xero for read-only access, and there is a 14-day free trial with no card.