Entrepreneurs - how much should you pay yourself?
- By Daniela Baker -
- Jul 23, 2012
How much should you pay yourself when you are an entrepreneur? Here's a guest blog on managing finances while starting a business...
Working for yourself comes with plenty of perks, but there are many tough decisions that you also must face. One of the hardest for many entrepreneurs and small business owners is determining how much they should pay themselves, and whether that income will come in the form of a regular salary, percentage of the profits or a combination of the two.
The Different Approaches
Here are some of the common approaches that entrepreneurs in both the US and UK take when it comes to their compensation:
• Pre-determined Salary: In this instance, the entrepreneur has determined a specific amount to pay himself/herself on a regular basis; often, this paycheck comes one - two times a month.
• “Leftover” Approach: The owner first focuses on paying the business’ monthly bills, and then pays himself/herself with whatever money is left over. With this approach, the entrepreneur does not have set wages, which can be difficult when it comes to monthly budgeting and setting (and achieving) long-term financial goals. This can be quite risky and can lead to a deterioration of his/her personal credit if the entrepreneur is unable to pay his/her own personal bills at the end of each month.
• Percentage of Profits: Many entrepreneurs pass up a regular salary altogether and instead simply pay themselves a set portion of their start-up’s profits. Depending upon the economy and the success of the company, this could mean going several months with no income.
• No Compensation: And then there is a segment of entrepreneurs who forgo compensation altogether. Instead, they focus on covering the expenses of their company and reinvesting any leftover funds back into their business. Often, this is the case with brand new start-ups. The percentage of people who go this route may be larger than you think. According to research conducted and published by Global Entrepreneurship Monitor (GEM), in 2011, 4.7% of 18- to 64-year-olds in the U.K. were nascent entrepreneurs who were actively setting up a business that had not paid the owners for more than three months; in the U.S., the percentage rose to 8.3%.
Factors to Consider
Four helpful factors that entrepreneurs can consider when determining how much to pay themselves:
• Decide on an approach: There are several different philosophies that can be used when determining the set amount of income: market-based wages, monthly budget and percentage above employees are just three of many. With the market-based approach, the entrepreneur researches to see what others who complete similar tasks are being paid by other companies within their industry. Those who practice the monthly budget approach look at their personal cost of living to determine the appropriate amount. And a third set of entrepreneurs look at what the others within their small business are being paid and then come to a figure by paying themselves a percentage above that amount. There are pros and cons to each approach, so it’s important that the entrepreneur chooses one that he/she trusts to make sense for the business.
• Understand the value of your time: Instead of arbitrarily picking a number, entrepreneurs should take the time to truly understand the value of the time that they are devoting to their company. When practicing this exercise, they should consider the number of hours they spend on work and the tasks that they are completing. Equipped with this information, they can then research how much it would cost their business to hire a contractor or vendor to complete the same work.
• Review the overall business situation: After determining their hourly value, many entrepreneurs come to the realization that their venture can’t afford their work. This presents the opportunity to set some realistic goals for the business. If the start-up can’t afford to payout the full wages that the founder is seeking, the founder can start out at 70% of that amount with written goals in the business plan to increase those wages by a certain percentage each year.
• Seek advice from a tax professional: Both the US and UK have very detailed tax laws, making it important to understand all of the ins and outs before any payouts are made.
Freeing Up Funds
If an entrepreneur finds himself/herself in the spot where the company can’t afford to pay the amount hoped, there are a couple of moves to be made as the business owner to help improve the cash flow to ensure future compensation. Often, this is through grants, small business loans and the proper utilization of credit cards. This is why it is so important for an entrepreneur to take the time to research credit cards for small business when starting out.
Many small business credit cards offer more flexibility than you receive with a personal credit card. This enables small businesses to get the supplies and services they need without having to find the funds to pay for the necessary resources up-front. This frees up money in the company’s monthly budget to create a regular salary, enabling entrepreneurs to pay themselves to cover their personal needs.
Image from Flickr
By Daniela Baker. Blogs at
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