A business owner gets to come up with a budget for a paycheck – for him/herself. It sounds great, doesn’t it? You get the freedom of having the salary you want. However, it’s only good in theory. The majority of business owners have a tough time knowing what to give themselves. They often ask themselves three key questions:
- Should I pay what I need to handle the expenses?
- What can my business afford?
- What was my previous salary like before I began my business?
The best thing a business owner can do is take all three answers into consideration. If you want your business to succeed, the best thing you can do is reduce your income for a short period of time. Pay yourself less than you’re actually worth to ensure the business’s survival.
1.How Much Do You Need?
The salary you go with depends on three things:
1. Living expenses
3.Comfort level for using your personal savings
Be sure you write out a list of your expenses that includes everything: rent, utilities, car payments, insurance (medical, car, home, etc.), gym memberships, etc. One of the biggest mistakes new business owners make is not taking these into consideration. Add up the yearly personal expenses, divide it by 12 and you’ll get your monthly salary.
After that, decide how much of your savings you’d be happy with drawing from early on. Be sure you have two separate savings. If you’re keeping your job, add the yearly salary to the personal savings. Subtract that number from the total yearly personal expenses, dividing it by 12. This will provide you with a minimum amount – even if you’re supplementing the income at the start.
2. What Is Your Worth?
After you’ve determined the monetary amount, it’s time to look at the skills and knowledge you have, the work you’ll be performing, and the time you’ll be putting into it. There are two methods to help you determine your worth:
- Open Market Value – This looks at your skills and experience and what an employer would pay you for them.
- Comparable Companies – What owners of similar companies are paying themselves. To get this information, look at trade associations, the local Small Business Development Center or other entrepreneurs.
Keep in mind that neither method takes into consideration that you’re the owner or that you’re starting a business. So, you can either factor in an offset of three to five percent or look at the investment as a possible long-term advantage for compensation.
3.What Is Your Business Able To Afford?
After you’ve got your salary needed and deserved, you need balance the amount against the finances of the business. Look over the cash-flow projection in the business plan to determine if you’ve got enough money to handle what you pay yourself and your expenses.
You want a cash flow that’s big enough to pay for your salary, reinvest it and leave no room for mistakes. Bear in mind that the majority of start-up companies usually operate in the red for up to two years. You may have a minimum salary range until your business picks up.
Consider putting your salary on a base and give it a bonus structure once it starts breaking even, as this tends to be best for most companies. One idea is to take some of the profits every fiscal quarter after your business is in the black. Of course, what these bonuses are can vary based on three things:
- Business owner’s goal
- Personal financial needs
- Owner’s philosophy for earnings reinvestments
You’ll want to re-evaluate the salary once your business becomes profitable on a constant basis. Re-investing some of the money back into the business is necessary but always base how much you take out on the industry and your goals. Do a reassessment of your salary every six months. As the business grows, things will change with its capital needs and cash-flow model along with your needs.