Answer these questions before you read on
Commit to an answer before you open each one. Together they show where the problem is.
1How much did the promoter family take out of the business last year, in total?
Salary, dividends, loans, and family expenses through the company. Most promoters underestimate it.
2How much of last year's profit actually reached the bank?
If half of it is still with customers, you can only spend the other half.
3Is there a director's loan account that grows every year?
Loans from the company to directors face restrictions and tax consequences.
4Does the family's monthly spending depend on this month's collections?
Then every slow customer becomes a household problem.
5If the bank asked you to bring money in tomorrow, could you?
Promoters who take everything out leave the business with no cushion.
The question isn't how much profit you made. It's how much cash the business can spare.
Why profit is the wrong starting point
Profit is before tax, before loan principal and before the cash that growth ties up. A safe promoter pay starts with what's left after all of them:
Work out your safe number
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Salary, dividend, interest or loan?
| Method | For the company | Points to check with your CA |
|---|---|---|
| Salary | A deductible expense; paid through payroll with TDS | Remuneration limits and approvals for directors under company law; taxed as salary |
| Dividend | Paid from profits after tax; not deductible | Taxed in the shareholder's hands; needs board and sometimes shareholder approval |
| Interest on promoter loans to the company | Deductible if genuine and documented | Rate, documentation and TDS |
| Loans from the company to directors | Not an expense | Restricted under company law; can be taxed as deemed dividend. Avoid as a routine method |
Six businesses, six versions of the same problem
The same problem looks different in every industry. Pick the business closest to yours:
These are composite businesses with illustrative figures, built to show how the method works. They are not CFOSurge client results.
Distributor, ₹45 crore turnover
The numbers (₹ lakh, illustrative)
| Profit before promoter pay | 62 |
| Tax | -16 |
| Growth in receivables and stock | -48 |
| Safe number | nil |
| Safe promoter pay this year (₹ lakh) | ≈ 0 beyond salary |
The diagnosis
The profit hadn't reached the bank, so the withdrawals came from the CC.
The full solution, in order
- Set a fixed monthly pay of ₹2.5 lakh.
- Pause top-ups until receivables come down.
- Rebuild a reserve.
Don't do this
- Taking out profit that's still with customers.
Numbers to watch every month
- Actual vs policy withdrawals
- CC balance
Component maker, ₹38 crore turnover
The numbers (₹ lakh, illustrative)
| Director's loan account | 80 |
| Added this year | 25 |
| Director's loan to resolve (₹ lakh) | 80 |
The diagnosis
Money taken as loans from the company creates company-law and tax risk.
The full solution, in order
- Agree a plan with your CA to clear or formalise it.
- Switch to salary through payroll.
- Stop new loans from the company.
Don't do this
- Using the company as a personal bank.
Numbers to watch every month
- Director's loan balance
Exporter, ₹60 crore turnover
The numbers (₹ lakh, illustrative)
| Profit + depreciation | 155 |
| Tax | -30 |
| Loan principal | -20 |
| Growth in working capital | -70 |
| Reserve | -15 |
| Safe promoter pay | 20 |
| Safe promoter pay (₹ lakh) | 20 |
The diagnosis
Growth will absorb most of next year's cash.
The full solution, in order
- Keep promoter pay at ₹20 lakh next year.
- Fund growth with packing credit, not promoter cuts.
- Review quarterly.
Don't do this
- Increasing withdrawals in a growth year.
Numbers to watch every month
- Working capital growth
Chemicals maker, ₹80 crore turnover
The numbers (₹ lakh, illustrative)
| Dividend declared | 100 |
| Free cash available | 40 |
| Funded from borrowing (₹ lakh) | 60 |
The diagnosis
The dividend was based on profit, not cash.
The full solution, in order
- Check cash before every dividend.
- Phase the dividend over the year.
- Plan it in the budget.
Don't do this
- Declaring dividends from the CC.
Numbers to watch every month
- Free cash after tax and capex
Contractor, ₹25 crore turnover
The numbers (₹ lakh, illustrative)
| Family expenses through the company | 18 |
| Family spending to separate (₹ lakh) | 18 |
The diagnosis
Household spending confuses costs and creates tax risk.
The full solution, in order
- Separate family spending into personal accounts.
- Raise promoter salary to cover it.
- Write a policy.
Don't do this
- Running household costs through the business.
Numbers to watch every month
- Personal costs in the ledger
IT services firm, ₹12 crore revenue
The numbers (₹ lakh, illustrative)
| Profit + depreciation | +142 |
| Tax | −15 |
| Founder salaries | −48 |
| Growth in working capital | −39 |
| Reserve built (₹ lakh) | +40 |
The diagnosis
A fixed salary and planned dividends kept cash healthy.
The full solution, in order
- Keep the policy.
- Declare a dividend after the accounts close.
- Review annually.
Don't do this
- Changing the policy in a good month.
Numbers to watch every month
- Reserve months
Hover over a business for a preview (tap on a phone), then click to open the full case.
Set a promoter pay policy
- Fix a monthly promoter pay below your safe number.
- Pay it as salary through payroll, on the same date every month.
- Top up once or twice a year as dividends, after the accounts show the cash.
- Stop routine withdrawals and family expenses through the company.
- Clear or formalise any director's loan account with your CA.
Review it every quarter
- Recalculate the safe number with the latest figures.
- Compare actual withdrawals with the policy.
- Decide top-ups only after the forecast.
- Review the method with your CA once a year.
Mistakes promoters make
- Taking out last year's profit when this year's cash is still with customers.
- Unrecorded withdrawals and family expenses through the company.
- A director's loan account that only grows.
- Dividends declared without checking cash and approvals.
- No reserve for a bad quarter.
Official sources and guidance
Rules, rates and thresholds change. Check the current position at these official sources before acting.
- Income Tax DepartmentThe Income-tax Act, advance tax, TDS and Form 26AS
- Ministry of Corporate AffairsCompany filings and the Companies Act
ReferenceKey terms in plain English
4 terms
- Director's remuneration
- Salary and other pay to directors, subject to company-law limits and approvals.
- Dividend
- A distribution of profit to shareholders.
- Deemed dividend
- Certain loans or advances from a closely held company to shareholders that tax law treats as dividends.
- Director's loan account
- The running balance of money lent between a company and its director.
Questions owners also ask
Is it better to take salary or dividend from my company?
It depends on your tax position and the company's. Salary is deductible for the company and taxed as salary; dividends aren't deductible and are taxed in your hands. Decide the mix with your CA each year.
Can I take a loan from my own private company?
Loans from a company to its directors are restricted under company law and can be taxed as deemed dividend. Avoid it as a routine way to take money out, and take advice before doing it.
How much should a small business owner pay themselves?
Start from cash available after tax, loan repayments, working capital growth and a reserve, then set a fixed monthly pay below that and top up from cash that has actually arrived.
Want a CFO to work through this with you?
If you'd like your safe promoter pay worked out from your own numbers, A CFOSurge CFO can go through it with you using your actual numbers.
- Plans from ₹50,000 a month, fixed after a free assessment
- Free consultation with a senior CFO
- No cost, no obligation
- Pay nothing if you don't see value in the first 2 weeks