Payroll Vs. Dividend
Payroll and dividends are two common forms of disbursements made by small businesses. If you have employees, you are obligated to have a payroll system to pay contracted salaries or wages to your workers. Dividends are an optional disbursement of company earnings to owners.
The term payroll refers to the list of employees you pay a regular wage to. Companies make income disbursements to employees usually on a weekly, bi-weekly or monthly basis. As the company owner, you may take a salary from your business, meaning you are on the payroll as well. Larger companies have a human resources department to manage payroll. In a very small business, you may manage payroll yourself as the owner.
The money you pay employees for their work is part of your investment in the operation. Labor is usually one of the highest ongoing expenses a business incurs. Each person on your payroll should provide some benefit to the company's ability to derive a profit or achieve its goals. A common measure of productivity is the amount of revenue generated divided by the number of employees or the total amount of your payroll. An efficient business gets the most returns on its payroll.
Dividends are one form of return paid to company owners. You may pay a dividend monthly, quarterly or annually. A dividend is essentially a cash distribution from your retained earnings, which is the accumulated net income for the business. When you pay dividends, each owner of the company receives a payment equal to his proportional ownership of the company. A 10 percent owner would receive 10 percent of the dividend distribution, for instance.
The primary purpose of dividends is to distribute income or excess cash to company owners. Investors in a business expect to derive profit or income from their investment. Dividends and earnings distributions are common ways companies pay owners. A dividend provides an incentive for owners to maintain their ownership and to continue to support the business. Newer, growing businesses often hold on to cash to reinvest in further growth.