Here's how to determine what you should pay yourself and when to give yourself a raise.
During the startup phase, it shouldn’t be surprising to find yourself asking, “Where’s my money?” over and over again. That’s because salary -- or a lack thereof -- is one of the main frustrations small-business owners experience during startup. You’re most likely working harder than you’ve ever worked, but I'll bet you feel you’re not really receiving adequate monetary compensation in return. Welcome to the world of entrepreneurship!
When it comes to paying yourself a salary, you’ve got to remember an important point: You’re in this for the long haul, and your rewards and compensation will come once you’ve got your business established. You have to be patient, because paying yourself too much too soon is a sure recipe for disaster.
Every business consultant and accountant will tell you that your compensation needs to be a secondary consideration during the startup of your business. Focusing only on how much you’re going to pay yourself will detract from the overall purpose of the business and could drain the company of necessary cash resources during critical growth phases.
Of course, that’s not to say you don’t deserve compensation -- you just need to be realistic that it may take awhile before your business can provide it to you. That’s one reason entrepreneurs are often advised to start a business part time while maintaining their current job, so there are other sources of income to help carry you through the startup phase. When it comes to compensation, having patience will allow your company to grow to the point where it can support a reasonable compensation package for you.
There are a few things you’ll want to keep in mind when determining when and how much you can expect your business to compensate you during the startup phase:
- You’ll most likely not be able to take a real salary for the first six to 12 months you’re in business.
- You should have enough in savings to cover your living expenses so you’re not relying on your business to cover personal expenditures.
- When you do start paying yourself, determine what you would be worth in a similar position if you were an employee. This is a good starting point when the company is able to sustain your payroll. While you may feel you deserve more, you need to start small and work your way up the compensation scale as your profits allow.
- Owners often take draws to supplement their payroll, if profits allow. For tax purposes, the payroll and draws are kept separate. They’re also classified separately on your financial statements.
- Don’t increase your compensation just because the business has some extra cash. That money should be saved for expansion purposes and unforeseen situations. If you get in the habit of always taking out the extra cash as compensation, you may not be able to monetarily handle any unforeseen circumstances that could be detrimental to your business. Ensure that your business has money set aside for a “rainy day.”
The key to paying yourself the right amount is to remember to keep enough aside so you don’t drain the business of its resources by taking too much money for your own personal use. It’s easy to get caught up in the excitement of growth and to want to increase your own standard of living. Just do it wisely and be sure to consult your accounting professional for advice on how much you should be taking and when. An outsider’s advice can help you make financial decisions that are good for both you and your business.
Reprinted from Entrepreneur.com.
The Small BusinessToolkit (us.smetoolkit.org), is a complimentary, online resource with an array of new features providing expert advice for starting, growing or maintaining a business. The tools include daily expert advice by Jim Blasingame, the #1 ranked small business expert on the Internet. A blog called Deborah’s Biz Basics sponsored by BuzGate.org provides a forum for women to discuss business issues and get advice. A small business video learning series is available covering topics such as incorporating, bookkeeping, managing credit and avoiding burnout. The toolkit was introduced in 2007 in the U.S. for Asian, Black, Hispanic, Native American and Women-owned businesses, and contains thousands of how-to articles, free Web software, press release distribution offerings and directory listing, financial calculators, business readiness quizzes, HR and more. Most of the toolkit is now available in Spanish. The new SME Toolkit was developed by the International Finance Corporation (IFC) of the World Bank and IBM, along with other partners. Click here to go to the SME Toolkit.
is Entrepreneur.com's financial management columnist and president of RPPC, Inc., which helps entrepreneurs success in their businesses