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How To Set Your Salary As A Business Owner

How To Set Your Salary As A Business Owner

Deb Martens - Friday, March 10, 2017

This is probably one of the most difficult decisions for you to make as you start up your business. It can be overwhelming and exciting at the same time as you see money come into your business account. However, there are some serious questions to consider as you begin or re-examine your venture.

Yes, there is freedom in setting your own salary. At the same time, in practice, many business owners find it a difficult balance to strike when setting their salaries. What can your business afford? What salary did you leave behind when you quit your job to start your business? Should you pay yourself what you need to cover your expenses?

 

It’s important to factor in all three questions and many more. You may be more than willing to accept a drop in income for a season. Keep in mind that paying yourself far less than what you’re worth (or even nothing at all) creates a false picture of your business’ viability and long term sustainability. This affects both you and any investors you may have (now or in the future).

 

Your salary needs will depend on your financial situation, your comfort level in drawing on your savings (or borrowing money), and your living expenses. The best step to start with is to put together an exhaustive list of all of your expenses. You should include monthly, quarterly, and annual expenses. Remember to jot down the costs of your: mortgage/rent, car payments, insurance (all types), utilities, gas, credit cards with outstanding balances, groceries, and anything else you have as expenses. One of the biggest mistakes a business owner can make is underestimating personal expenses.

 

Once you’ve computed your annual personal expenses, divide by 12 and you’ll know what your monthly salary needs to be. You’ll need to think about how comfortable you are in drawing on savings to meet that salary. If you are staying at your current job, add your annual salary to your personal savings figure. Then subtract that number from your total annual personal expenses, and divide by 12. This will give you the minimum monthly salary you’ll need, even if you decide to supplement your salary with employment income or personal savings. This gives you a range of the minimum salary you need to cover your personal expenses to the bottom salary you can afford to take by supplementing your income—your minimum salary range.

 

The next step is figuring out your market worth. There are two simple, and both valid, ways to do so.

 

  • Comparable Companies: Take some time to research your competitors. What are the company owners in your industry (keeping in mind similar size) and in your region paying themselves? It’s not difficult to find out this information. Ask around to local companies, check with trade associations, or small business/entrepreneurship development organizations.
  • Open Market Value: Considering your skills, expertise, and experience, what would an employer pay you? Granted, you won’t be compensated for all the extra time you’re putting into your business, knowing the going salaries of employers in your industry is quite helpful. This gives you a frame of reference in setting your salary.

 

 

It’s almost inevitable that your business income will fluctuate. A good starting point may be a base salary with a bonus structure that kicks in when your business reaches beyond the break-even point. Even though your goal might be to reach your market value salary quickly, it’s probably wise to leave some profits in your business to create a safety net and to fund future growth.

 

However you decide to compensate yourself in the beginning phase of your business, it’s crucial to reassess it every six months. As your business grows and changes, it’s income model and capital needs may also change (sometimes dramatically). Regular assessments keep you current and empower you to adjust accordingly.

 

I hope these simple steps have helped ease your mind concerning setting your salary. The key is to be thorough as you go through your expenses and re-evaluating your structure on a regular basis!

 

PS. If you're ready to gain some clarity and a written step-by-step plan to reaching the next level in your business and income, we're here to help. Grab a slot on our calendar and we will explain exactly how partnering with Fyrefly Media to write up a Strategic Business Blueprint for your unique business can quickly bring focus, increase your revenue and get you where you're going faster than ever before. Chatting with us free of charge, "sales-sleaze" free and comes with a complimentary comprehensive report of your current online business footprint. (This is the same quarterly report we draw up for our clients and usually charge $250 for).

 

 

 
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