If you are starting a new small business, one of the toughest decisions you will face will be how to determine your own salary. As the center of your small business needs, you probably have a hand in all the various functions that your business performs but until your business grows, it is unlikely that you will be properly compensated for your efforts.
As the business owner, in theory, you are entitled to draw upon the company for your expenses but it may be a good idea to institute a salary for yourself as a tax-saving measure for your company. In this post we look at the factors that determine the best way to pay yourself from your small business:
1. Determine your Expenses Before you look at your business, examine your lifestyle and the expenses that occur monthly and cannot be avoided. This is essential to determine the minimum amount that you should draw from your company for you and your family to survive.
While you may sacrifice time and work extremely hard at your business, you cannot give way on essentials like rent and amenities; therefore you need to discover exactly how much you require to live comfortably.
2. Assess Your Value As a business owner you will need to take a step back from your business and look at your contribution to the business. Questions that will help you decide your worth are:
A. How much would you be paid if employed elsewhere?
B. How much would you earn at a competitor?
C. How much do you pay your staff? Seasoned business experts suggest that it is key to differentiate your worth from what you do for your company versus how much you gain as a result of owning your business.
3. What can your business afford?
While there are advantages to drawing a higher salary, the most important factor in resolving what pay you receive is what is the current profitability of your business and how much it can afford to pay you. Most business owners factor in their salaries into the overall company operating costs and determine accordingly what amount they are entitled to as salary.
4. What are you entitled to?
Based on factors like educational qualifications, size of your business, the scope of work and the present state of the economy, decide your salary proportionately.
The rate at which you pay your staff is important to consider here, while you may spend a lot more time ideating and thinking about your business and networking, you need to determine how much time you spend making your business profitable in the present and pay yourself proportionately.
There are several reasons why you should pay yourself a salary-the most important of which is that it will motivate you to make your business a success.