Paying yourself as a small business owner is tricky
It’s easy to assume that business owners are making large paychecks. They’re at the top of the hierarchical model with no one really to dictate how large or small their check should be. But not all business owner salaries are created equal – in fact, there are often huge disparities, depending on the company’s ratio of expenses to profit. Some choose to go with a take all approach. Others calculate their salary as a percentage of profits. At any rate, business owners have to have money to live off of, but they may struggle with determining how much that amount should be.
There’s no hard and fast answer to this question, but I think the best approach is to be realistic, yet fluid. Incoming revenue can fluctuate from time to time so you may have to adjust your take home pay accordingly during leaner months. However, if you’re consistently hitting estimated revenue numbers, survey the average salaries of what people who have similar duties as you would make in a year and use that as a starting point.
Next, take a look at how much you have left over after paying employees, bills and other expenses. If the amount you have left over is enough to pay yourself the average salary of people who work in a similar position, then you’re in the clear. But what happens if even after you subtract your salary, there’s a surplus? This is the time to take a look at the financials across the company.
Consider reinvesting after paying yourself
Consider how much you have set aside in a cash reserve – is it at a level high enough to pay for unexpected emergencies or opportunities? If the answer is yes, then perhaps you want to reinvest some of that money in innovating your business in order to attain future growth. If you have a good amount of money allocated to these things, then come up with a percentage representative of the amount of time and work you put in to reach that surplus, and pay yourself accordingly. You can also choose to pass this along to employees as a bonus.
But even though your business is your baby, as a rule of thumb, try not to take more than 50 percent of profits for your salary. And if your company is brand new, for the first year or so, it may be wise to take home only enough to cover personal costs and nothing more until you become more established in the industry. If you need advice, find an accounting firm or an organization specializing in small business counsel to help review your numbers and make a decision on what a reasonable annual salary should be.