How Much Should a Small Business Owner Pay Themselves?
When it comes to paying themselves, small business owners can be in a double-bind. If you under-compensate yourself, you can put undue pressure on yourself and your business could suffer. If you overcompensate yourself, you may be unable to give your business a fighting chance. Here are five salary models for business owners to help decide how much to pay themselves.
1. Percentage of Profits
As a business owner it’s important to distinguish between revenue earned and the amount of profit your business produces every month. For example, you may bring in $10,000 per month but after paying taxes, overhead and other expenses, your profit may only be $4,000.
Your entire profit can include stock options, dividend payments or direct income earned from sales. It’s up to you to determine how much exactly to withdraw to pay your salary. Just remember to only calculate this figure based on the net income, or profit, not the gross.
2. Market Value
Calculating a market-based wage is perhaps the most straightforward. Do research based on your job title and your industry, then use this information to calculate the going rate for someone in your same position.
3. Experienced-Based Salary
In addition to the market-based wage, another way to figure out how much to pay yourself is by taking into account the amount of experience you have in this particular industry. In other words, what would you pay someone else in your position based on your knowledge, contacts and expertise? Those are often intangible benefits that come with valuable perks for a new business.
4. Bare Minimum, with Perks
How much do you need to earn in order to comfortably pay your bills? As the business owner you have to strike a balance between paying yourself enough to live on and having enough cash flow to run your business. In the beginning stages of a new business it may not be reasonable to withdraw a full salary. Instead, you’ll have to survive on the bare minimum, with an agreement to withdraw a larger salary in the future.
Perhaps the business can foot the bill for your cell phone and travel expenses, or even a company car to help out with the expense load? Look for alternative ways to get paid with various perks until the business is secure enough to pay you a higher salary.
5. Re-Investment for Growth
Some business owners prefer not to withdraw a salary at all. It’s a way of giving the business a leg up to survive and thrive. This means, of course, that you would need to have an alternative source of income, or come up with ideas to reduce your overall cost of living.
Money taken out of the business means funds are no longer available for business growth. It may be within the company’s best interest to continue investing all the funds into the business instead of dividing a portion towards salary.
Please note that this list of reasonable compensation options for small business owners is not exhaustive. There are other tips, as well as combinations of several that may work better for your personal situation.
Strategic Funding provides needed operating funds to small businesses. Strategic Funding has helped business in hundreds of industries. Industries served include: restaurants, personal services, construction, medical, manufacturing, agriculture, retail stores, automotive, and food stores