How to Determine Your Salary as a Small Business Owner
If you’re just starting your business or you’ve been in business for a while, you may be struggling with the concept of paying yourself consistently. Now if you’re an entrepreneur, small business, or aspiring business owner, which if you’re taking the time to read this, I am sure you are. The way you get paid can look a little bit different than when you were working for corporate and you got that consistent paycheck, you could, without a doubt, know when that paycheck was going to come, how much it was going to be, and you were set. Now, when you go into business for yourself, it’s really easy to struggle with:
- How do I pay myself?
- When do I pay myself?
- How much do I pay myself? Or,
- Should I even be paying myself?
Before I’ll get into details and answer all those questions shortly, here’s what I want to say to you that is 100% non-negotiable: Pay yourself!
Now, let me ask you some questions: Would you ever work for someone and not get paid? NO.
Would you ever expect someone to work for you and not get paid? The answer is NO.
Well, these standards should stay the exact same when it comes to you. As a business owner, you should get paid!
“Treat yourself with that same respect and kindness that you would give someone else and pay yourself.”
So here’s the key, unlock:
- The 2 different areas that you can pick to pay yourself.
- Determine if you are ready to pay yourself.
- My personal experience of paying myself from my first tech startup.
Before anything else, let’s go back to basics first: Revenue less Expenses = Profit
Profit is what you have leftover from that Revenue after you’ve paid all of your expenses (Cost of Goods Sold, Other Operating Expenses, and Non-Operating Expenses).
Using that simple formula, I’ll introduce to you the two different areas that you can pick to pay yourself.
TWO DIFFERENT AREAS TO PAY YOURSELF:
1. EXPENSES: Owner’s Pay
Whether you are a maker of goods or a service provider, there is a time that you, as the business owner, put in to complete the work. This area is the same as you are working in the corporate world – using your time to produce a good or deliver a service. As I stated above, in a corporate world, you got that consistent paycheck, you could, without a doubt, know when that paycheck was going to come, and how much it was going to be and you were set.
With the same elements, these are also applicable to you as a business owner to have:
- Consistent paycheck
- Know when you will be paid
- Know how much it will be
As a business owner, the first place that you can pay yourself is as an expense: Owner’s Pay – your salary as the owner. This expense is where your pay comes from.
For example, you sell candles for $20. Well, that $20-candle will not be completed without your work and time. Thus, of that $20 that you charge the customer for that candle that you made, there’s a part of it that is YOUR EXPENSES, YOUR PAY for the time you spent making that candle.
“Well, Marguerite, how do I know how much to pay myself?”
Your goal here is to determine your “sweet spot pay” where you are not underpaying or overpaying yourself. And there are 2 guardrails that you can use:
FIRST: Look and find out the typical average salary range of the position the same as yours.
Think of it this way: If you are searching for a job or a certain position, you’re going to look and try to find out “How much does this job pay?” You can go to different places like freelancers.com or salaries.com and start to get a feel for the wages or the rate for what you’re doing.
SECOND: Look from the top down. What I mean by that is that you ask yourself the following questions:
- What are my lifestyle needs?
- What do I need to be paying myself in order to contribute or sustain the lifestyle that I desire?
Now, the second area you can use to pay yourself:
2. PROFITS: Reinvest + Bonus
Now, the second place you can pay yourself is from the profits you make. Meaning, you’ve generated that revenue, you’ve taken out all of the expenses that you’ve needed to deliver the goods/service, and what you have left over is PROFIT. Now, out of those profits, there are two things that you can do: REINVEST in your business and take out a BONUS. The BONUS portion of your profits is what I call “double-dipping,” it’s the second place you can pay yourself.
From your profits, what you decide to not reinvest, the other portion that’s left of your profit, that will be your bonus check. In short, after you’ve taken the rate you’re comfortable with what you’re reinvesting, and what’s left of it will be paid as a bonus and you should applaud yourself for all of your hard work (and your team!) and pay yourself!
The two different areas to pay yourself: consistent paycheck [expenses] + bonus [profit]
- I want you to always pay yourself that consistent paycheck – that salary or baseline level that you’re comfortable with, that no matter what happens out of every sale, you know that you’re getting paid out of it. And that’s going to be factored into your operating expenses.
- Next, you’re going to double-dip into that profit that’s left over. After identifying the amount you want to reinvest back into your business, there’s going to be a portion left, and that of that portion that’s left, you’re then going to pay a bonus to yourself.
“But Marguerite, does this hold true for every stage that I’m at in my business?” And I’m going to tell you “Yes, the concept stays true,” but I’m going to show you the nuances now:
Nuance #1: Your future growth efforts that you need for your business.
One of the things that will change as you go through different stages of your business is the amount of money that you reinvest within your business. Yes, the concept stays the same but the reinvestment rate will change depending on what your financial plan is as far as what you’re funding for the future.
Nuance #2: Your lifestyle needs.
This is incredibly important and this is where I promise that I was going to tell you a story about my very first tech startup I had and how I thought about the reinvestment rate. And here it goes. When I started my very first tech startup, I was working full-time, so I had a full salary that I was bringing in. So when I started that company, it wasn’t important for me to take money out of the business to pay myself because I was already sufficiently paid through the income that I was generating from my corporate salary to fuel my lifestyle. So for me, I had a full-time job, and my lifestyle needs were completely covered, so instead of using every dollar of profit that I made to pay myself, I put it back into the business (reinvested it) so we could fuel the growth.
Think of the following:
Now that gets me to a second important point there. I want you to think about your lifestyle overall: can you afford to not take money out of your business and reinvest it?Because I will tell you, there are advantages to not taking the profits out and re-investing 100% of it into your business, and one of those is your business will just grow a little bit quicker. But that’s not a reality for everyone and it’s not a sustainable reality for a long period of time. It’s just that you have to make that conscious decision.
“Am I OK with in my lifestyle right now to be able to reinvest 100% of my profits back into my business”, and that’s you being very clear on what your goals are for your business and where you are in your lifestyle.
I had a clear vision of the trajectory that I wanted to take the business. I didn’t want to take in outside investors. I didn’t want to go the VC route. I wanted to maintain 100% control of my tech company. Because of that, I wanted to grow it organically, through my sales, profits, and the funds that I initially put in.
So there you have it, these are different areas that you can look to pay yourself as a small business owner.
If you’re not paying yourself, stop doing that right away, and if you are paying yourself already, kudos to you, and make sure you’re taking advantage of what I call double dipping. Pay yourself twice! Once as the salary and again as the bonus.
If you are paying yourself consistently and eyeing to reinvest some percent of your profit in your business, update your financial plan now.