You’re the business owner, and you create the budget. So, the size of your monthly paycheck and other business expenses is entirely up to you. While the freedom of determining your salary sound amazing in theory, many business owners find it a challenging task. Should your salary cover personal expenses only? What can your enterprise afford for your salary without compromising its profitability? Or should you pay yourself the salary you left to start the business?
Well, your best bet is to consider these three factors. For the success of your business, you may consider a lower salary (temporarily). On the other hand, too low salary or paying yourself nothing at all paints unrealistic image of the viability of the business both for you and prospective investors.
In addition to the simple budget templates you might be using, here are other tips to help you budget your business salary.
Determine what you need
The size of your paycheck will depend on your financial situation, your desired comfort level, and your daily expenses. First, create a comprehensive list of your daily expenses. Be sure to list all monthly, quarterly, and annual expenses. These expenses include car payments, any credit card with an outstanding balance, car insurance, mortgage, grocery bills, gym memberships, and more.
Underestimating personal expenses is a common mistake that most new business owners make. In case you end up slipping into the red, the chances are that your business will fail too.
What you’re worth
Depending on your knowledge and skillset, the expected workload, and time you will put in, determine what your salary should be. Given your skills and your experience, figure out what an employer would offer you in today’s market. Though this salary doesn’t take into extra time you should put in especially when launching the business, the size of income you sacrificed to launch your business is an important benchmark when calculating your salary.
The other method of determining your business salary is to find out what other business owners in the same industry (with same business size as yours) and geographic location pay themselves. Note that this method doesn’t take into account the risk you take in starting the business or the extra effort you need to put in. This is the primary reason some business owners increase the market-worth-based salary by 3% to 5% to offset the risk and extra responsibilities.
What can your startup afford?
After determining the size of your desired paycheck, try to balance it with what your business can afford. Check your company’s cash-flow expectations in your business plan and be sure that you have adequate cash coming in to cover the business’s operating expenses and your draw.
Ideally, your business cash flow must have a surplus large enough to provide your desired monthly pay, reinvest money in the business, and probably leave a margin for error. The bad news is that many startups operate at a very slim profit margin or even a loss, especially within the first six months. Therefore, expect a minimum salary level anywhere from six months to a year or two.