Setting your own salary is something many small business owners struggle with when they’re starting out. It’s a process that requires striking a balance between your personal expenses and the viability of your business.
We’ve combed through expert opinions and compiled some tips on how to determine an appropriate salary for yourself.
When Can You Pay Yourself?
Before establishing what you should be paying yourself, you need to figure out when you can afford to pay yourself. Many new business owners sustain themselves solely on personal savings or loans while their business is in its startup stage.
Business News Daily recommends asking yourself three questions to determine the right time to start taking a salary:
- Do I have sustained revenue?
- Do I have steady projected revenue?
- Is my business in the black (past the break-even point)?
Living off your savings is not ideal, but it’s a very common occurrence because many small businesses operate at a loss in their beginning stages. It can take up to a year to break even or show a tangible profit.
Successharbor, citing a U.S. Labor Statistics report, states that 50% of startups don’t survive more than five years.
With those odds, it’s understandable why many owners cut their salary costs from the business expenses and wait for their startup to become self-sustaining before paying themselves.
How Much Can You Afford to Pay Yourself?
Most sources agree on certain questions you should ask yourself to help decide on a reasonable salary.
The following questions come from Entrepreneur:
- Should you pay yourself just enough to cover your expenses?
- What can your business afford?
- Should you pay yourself the salary you used to make before starting your business?
These are matters you need to reflect on personally because the answers will be different for every business owner. You’ll have to carefully balance what you think you’re worth, what your business is worth, and what you might be willing to sacrifice for the success of your business.
Some common methods for calculating your worth are:
- Open market value: What would someone with your skills and experience get paid working for someone else’s business?
- Industry comparison: What are the other business owners in your industry in your location paying themselves?
Many sources suggest calculating a minimum salary range and including it in your Business Plan to help gauge what you can afford without you or your business going into the red.
- Calculate all of your living expenses (mortgage, car payments, utility bills, gas, etc.). This will show you what your minimum salary needs to be to keep you from using your personal savings.
- Decide how much of your personal savings you’re willing to dip into. This will determine the percentage of profits that remain in your business versus go into your pocket.
Some people keep their day jobs in the midst of running a startup and use that salary to cover (at least most of) their personal expenses, in addition to taking a smaller salary from their new business.
If you can supplement some of your salary with a day job or with personal savings, you’ll be taking a smaller cut from your net profits, which is not such a bad idea for a business getting on its feet.
Find a Balance with Your Business
As stated above, most businesses operate at a loss for at least the first six months. Your compensation will likely be within your minimum salary range for the first few years, but with continued success following your break-even point, you’ll eventually make your way towards open market value.
Some small business owners take their minimum salary until the business moves into the black and then take a percentage of the profits as a bonus. This bonus structure is a viable option that you can take every fiscal year to reach your market worth quickly. However, it’s ill-advised to take too high a percentage as your bonus. Most experts recommend leaving some profits in the business for security or future growth until your business is self-sustaining.
The bottom line is to calculate what you need to survive and what you can afford to take out of your business, and make sure to include your salary in your Business Plan. If you’re struggling with an amount, look to the other business owners in your industry or discuss your possibilities with your accountant.