One of the toughest decisions a business owner has to make is to set their own pay cheque level. While setting one’s own salary can sound exciting, it is indeed a difficult decision to take. You should draw the line where it is necessary for paying yourself your salary. Paying yourself too less or perhaps none at all may paint a picture that is unrealistic with regards to the sustainability of your business. You get into a bad habit of ‘missing out’ and I also believe it undervalues your own worth in your mind. Your time, effort and expertise do have a worth!
Factors on how to pay yourself as a business owner:
One aspect of your salary heavily depends on certain factors which include your financial situation, your daily expenses and your comfort level of having your personal savings. The initial step that you must take as a business owner is to make a list of all your expenses. Make sure you include all your expenses – from your annual to your monthly expenses inclusive of rent or mortgage, credit card bills, gym membership, grocery bills, car payments, fuel, insurance, holidays, gifts, savings etc. Don’t underestimate your personal expenses as is often done; even put in a 10% contingency.
Once you’ve figured out how much salary you’ll need throughout the year, you can now ease that ‘wage’ level into your business budget. If your personal lifestyle is beyond the means of the business and is not sustainable within the business, some hard decisions will need to be made. If you can’t make it work on paper, it’s even harder to make it work in real life.
Another important aspect is to determine your real worth and here are two ways:
Open market value:
Take into consideration your skills and experiences and think about how much you can get paid in today’s market. This salary most definitely will not include the amount of time you spend in starting up your business. However, the income you sacrifice to put up your business is important in determining your salary.
Take a look at what the other companies similar in size and within the same region and industry pay themselves. To compare personal income, check with other entrepreneurs within the same industry, the local business development and other trade associations. Another good strategy is to look up job vacancy ads and see what positions advertised are paying.
Both of the methods mentioned above don’t take into consideration the additional time spent on actually setting up the business. A 3-5% boost in the market-worth based salaries is used to balance the responsibilities and other risks. Others take it as a compensation having a business that is successful.
When you are already sure of the salary you need and deserve, you have to analyse the figures coming from your business’ financial capacity. Firstly, if you are a new or start-up business, you need to do a few checks to guarantee that the money coming into your business is enough to cover your drawings and other operating expenses. Since most start-ups initially start off with a loss anywhere from 6 months to 2 years, you need to plan accordingly and ensure you have a buffer. Do you have enough in reserves to cover not only the costs of the business (including likely additional for marketing to get it off the ground) as well as money so you can eat?
One way to handle your compensation at an early stage into your business would be by receiving a base salary then come up with a bonus when your business reaches the point of break-even. This may also be a nice incentive to achieve goals in your business. Giving a percentage as a bonus will be a case to case basis and will be highly dependent on the goals of the business, the owner’s personal financial needs and please remember you need to reinvest a certain amount of money back into the business to move on and up. It is also a good idea to leave a certain amount of the profits for your business as a safety net and remember to put aside for taxes, GST and super.
Once your business reaches the point of consistency, and you are consistently making profit, it is then time to re-evaluate your salary. This means that you can now have a salary increase that is equal in percentage to the annual growth rate of your business, and then reinvest the rest of the profit to the business. Don’t take too much out of the business and remember tax planning with your accountant and putting money aside for your future in the form of superannuation.
In every phase of your business, plan on reassessing your salary level every six to twelve months. This should be no different than employees; they should be having wage reviews on a regular basis as well. If you were an employee and didn’t get a pay increase for 6 years (award increases set aside) then would you still work for that company? Ask this question for yourself if you’ve been around a long while and can’t afford to increase your salary either. If your business is not reaching its potential and year after year you cannot give yourself a pay rise then things need to change. Either the business gets a prod in the rear or more hard decisions are needed.
For more valuable business tips, call me on 0411 622 666.
This and many other subjects will be covered in my Africa Mastermind this coming September – it’s sure to be awesome. Let me know if you’re interested to know more and I’ll email info as it becomes available.
Check out my other blog Are You Scared to Grow Your Business?