An expense often overlooked by most entrepreneurs is their own salary. According to a 2016 study, almost half of the business owners do not pay themselves a salary. However, many business advisers and financial experts advise business owners to include their own salary in the business expenses as soon as they can afford to. So, how much do entrepreneurs or startup leaders pay themselves? The answer to this question varies from business to business and from person to person. However, here are some recommendations regarding how much you should be paying yourself as a business owner!
It’s your business and your money, so you get to decide how big or small your monthly paycheck should be. While this may sound great on paper, but making the call on your paycheck is a tough to say to choose in practice. So, should you pay yourself just enough to cover your expenses or should you award yourself a big paycheck, leaving little for company growth? If you’re confused about what to do, then here are some ways for you to determine your market worth and what you should pay yourself each month.
Determine Your Living Expenses
Considering how much you need to meet your basic monthly expenses is a good way to determine your paycheck. You can determine your monthly expenses by considering essential costs such as food, rent or mortgage payment, expenses of spouse and children (if applicable), and health insurance. As a startup leader, you should be willing to ignore any expenses other than the ones mentioned when determining your salary/paycheck. Once you’ve created a personal budget to pay your expenses and debt, award yourself a ‘reasonable’ portion of the business’ profit—this will be your salary.
Consider Comparable Businesses
Another way to determine your market worth is considering what owners of comparable businesses are paying themselves. Here, comparable companies refer to companies having the same size, industry and geographical location as you. A good way to find this out is checking with trade associations or connecting with other startup leaders in your industry.
Balance off the Salary You Require and Deserve against Your Business Finances
To counterbalance the added risk and responsibilities, some startup leaders may give themselves a salary three or five percent more than their market worth. Other compromise their own salary for a potentially successful business in the future. This makes it important for startup leaders to balance off the salary you require and deserve against your business finances.
Start by checking the projected cashflow in your business plan to make sure that you have sufficient financial resources to cover your own salary in addition to the expenses required to operate the business. Ideally, the cash flow in your business should be big enough to pay the salary you deserve (the salary based on your market worth), save money for reinvestment and leave some for emergencies.
The bad news is that the above is unlikely to happen. So, the next best thing you can do is pay yourself a compensation within the minimum salary range. This is something you will have to live with for the first few years of your business. However, as your business reaches break-even and goes beyond it, increase your salary to compensation equaling your market worth.
The Early Years
In its initial years, your business may ebb and flow a bit. For this reason, it would be a good thing to start with a basic salary with a bonus structure that comes into action only after business has reached the break-even point. This is probably the best way to compensate yourself during the early years of your business. Once your business starts to generate considerable revenue, you can allocate yourself a percentage of the company’s profits during each quarter which will be your quarterly salary.
Depending on the personal financial needs, reinvestment philosophy, and business goals of the owner, the percentage of bonus can vary widely. You may want to get to a market-worth salary as soon as possible, but if you want your business to grow and succeed in the long term then delaying the above and leavings some profits in your business would be a good thing to do.
When your business starts to experience profits on a consistent basis, you can start re-evaluating your paycheck. Generally, this means increasing your salary to a percentage that is equal to the annual growth of your business, and reinvesting whatever remains in your business. However, just like the structure for bonus, there is no set way for determining how much you should increase your salary by.
A good thing to do here would be factoring in your business goals and the nature of your industry. For example, you may want to use the quarterly bonus structure and the flexibility offered by it if you are in the cyclical industry. On the other hand, you may ignore the salary increase altogether and utilize the additional money to invest in new products, marketing campaigns, or expansion plans if you believe your business can grow.
Re-Evaluate Your Salary from Time to Time
Consider revisiting/reevaluating your salary every time you achieve a milestone whether it is related to completion of a project, a product launch or revenue. This will ensure that you are using the business resources sensibly. At times, this may mean giving yourself—the startup leader, and other people who have helped your company to grow, a salary increase or a bonus that you deserve and your business can afford.
By using the four ways mentioned above, you can determine your salary as a startup leader—salary that is justifiable and ensures the growth of your business. Now get out there and make that money and enjoy the ride to success!
by Bobby J Davidson
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