Solving the Guesswork

Ultimately, how much you pay yourself depends on your business’ success.  The bigger the bacon, the higher the salary you could reasonably command.  It makes a lot of sense from the get-go. 

But despite this simple formula, most business owners are at a loss as to how much they should be paying themselves.  As the owner, you have the biggest stake.  Take out too much and your business is at risk.  Too little and you might personally struggle to even survive. 

Here are some pointers to strike a balance.

1. KNOW HOW MUCH YOU COULD TAKE OUT FROM THE BUSINESS – Seeing money coming in can be such a rush.  But remember that you should only pay yourself from profits NOT REVENUE!  Estimate your business’ taxes, payroll requirements, overhead, expenses, and fixed costs. Ask yourself…
   1. How much would a similar business pay someone in your role?
   1. What do recruitment agencies offer to pay someone in your positions?
   1. Is your pay directly proportional to the number of hours spent working?
   1. Is your pay reasonable compared to your employees’ wages?

• PAY YOURSELF LESS AT THE START  – Think about a bigger payoff in the near future.  If you pay your employees fairly while taking a smaller amount for yourself, they’ll appreciate your sacrifice more – which can do wonders for productivity. 

• NEVER UNDERVALUE YOURSELF – Turning in a profit during your first year is doable but unlikely.  But this doesn’t mean that you have to sacrifice a paycheck.  There really is no point starting a business of your own, if it’ll turn you into a glum miser for the rest of your life.  Personal financial issues are a huge cause of stress. And if you’ve got a lot of things going in your mind, you don’t make sound business decisions.  Pay yourself enough to have you and your family live simply but comfortably.

• PAY YOURSELF A BASE PLUS PERCENTAGE OF GROWTH – If your business isn’t seeing a profit, then you must pay yourself a reasonable wage.  NOT paying yourself should never be an option because you may never see an exit.  Having a reliable salary is vital to your survival (and sanity).  Begin with an amount you can live on and then reward yourself with a bonus on a monthly basis. 

While you’re at this, we recommend that you:

ADD YOURSELF TO THE PAYROLL – One of the biggest mistake business owners make is dipping their fingers into business funds.  Include yourself in the payroll and pay yourself regularly.  Factoring this into your business plan allows you to estimate all your expenses.  It also dampens the temptation of taking out occasional sums of money.  Note that occasional withdrawals of large sums raise eyebrows at the tax office;  and

BE TAX SAVVY!   – The point of a business is to personally earn from it.  The equation doesn’t end with sound cost-cutting practices.  You have to be tax-efficient as well.  Here are options that you must consider depending on the local laws that govern your business.

1. Take a straight salary – As with Tip #3, being part of the payroll is unlikely to raise suspicion.  It may not be the best tax-efficient options, but it’s easy to account for.

• Salary with dividend payments – Assuming you own stocks and shares, balance a minimal salary with dividend payments.  This is a tax-efficient option because dividends enjoy smaller taxes than salaries. 

• Consider accepting compensation in stock or stock options OR a combination of a salary and an annual bonus.