Why is it important for an entrepreneur to pay him/herself regularly in a consistent manner out of the business's earnings?
What will be an ideal response?
Entrepreneurs who do not pay themselves regularly tend to overstate their return on investment, because they have not taken their pay out of the net profit and treated the pay as a cost. This can also increase the amount of tax the business will owe. Anything that reduces the net profit reduces the tax on net profit. Of course, the entrepreneur will have to pay income tax on the money he/she receives as pay from the business, but generally the entrepreneur will come out ahead by treating some of the business profit as self-payment.
Another reason an entrepreneur should pay him/herself from the business is that it enables him/her to be honest about whether or not your business is really worth his/her time and look at the opportunity cost of running the business. Could he/she be making more money working for someone else, for example? Thinking entrepreneurially includes a realistic consideration of whether the entrepreneur would be happier or more successful not running a business.
Finally, the entrepreneur will be less tempted to make ethical mistakes (such as dipping into the business profits to buy personal items and luxuries), if he/she establishes, early on, a consistent method of paying him/herself from the business that is always included in the business's financial record keeping.
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