Paying Yourself A Salary

08 Aug

Posted by Andrew in Home business

Quote source :
Entrepreneur.com
Image source :
The Mooncake Box

It’s an age-old conundrum that faces every entrepreneur planning their business: What do I pay myself? There are a lot of different theories when it comes to this issue, but the two most common for startups are:

Pay yourself enough to get by. At least during startup until you are operating in the black. The argument here is to minimize your overhead in order to decrease the amount of capital required to make your business a success. Also, by reducing your overhead, your net loss will decrease or your net profit will increase, providing the business with lean operating requirements until it is well established.
Pay yourself what you are worth. Build that into your business plan so you have an accurate portrayal of how much capital you will need in order to finance your business. By paying yourself what you are worth, you aren’t painting an artificial portrait of the business that will change once you reach the black–operating costs will remain the same.

When you first start out, you tend to think that you are lowering your expenses if you don’t pay yourself a salary at all. However there are lots of drawbacks to doing that :

Your profit looks more than it actually is (since you haven’t factored in your salary).
It’s a psychological thing. When you think we’re already making money, there’s a tendency to relax. However, since your profit hasn’t taken into account, you might begin to think that you’re already in a “safe zone” when you may actually may be operating at a loss.
You’re not working to create a business that can sustain your financial needs. In other words, you may have to depend on your family or personal saving longer than you actually need to. Remember that psychological thing?
You are not giving a true representation of what your business is worth if you decide to sell it.
Your may not be providing enough for your tax and retirement funds. Eventually this will catch up to you and you will have a bigger mess to handle.

The quoted article from Entrepreneur.com goes on to provide a detailed method to determine your actual worth so you can arrive at a salary that is both realistic and correctly reflects market value.

So remember, you NEED to pay yourself a salary - even if it is just to cover you basic needs - right from the start.

Popularity: 34% [?]

Liked this post? Please share it :

These icons link to social bookmarking sites where readers can share and discover new web pages.

We'd love to hear your opinion!

Commenting policy: Comments that are spam, cannot be understood, rude or contain hate and profanity will be deleted. We really don't like playing moderator... so let's be nice folks!.