With everything small business owners have to be concerned about, you might not think paying themselves would be an issue. But it turns out that it is, and for many, not a small one. Business owners struggle to find that salary sweet spot for themselves—and not just when they’re starting up.
How do you know whether you’re paying yourself too much, too little or just the right amount? An article on Fox Small Business talks about this continuing struggle among business owners, including the example of an owner still wrestling with the question after being in business 10 years! Most aren’t aware how far-reaching this is. Hard to believe, but experts say that paying yourself too little or too much can actually lead to a company’s demise.
Business owners need to first know an important distinction: As a business owner, you’re paid a salary for what you do, but you get a return on what you own. Underpaying yourself may look like a good short-term strategy, but it really means something else is going on. Either you’re in denial about how well your business is doing, or you’ve completely lost perspective about the business, your home and family and your livelihood. Either way, you’re creating an unsustainable financial situation for yourself.
Key factors in finding the right salary level for yourself: Comparables (You can look up the information for publicly traded companies); what you’re paying employees; and tax planning, which financial advisors say goes hand in hand with compensation planning.
Even if you think you’re paying yourself at the “right” level, you should be taking a fresh look every year when you’re planning. After all, your business dynamics are constantly fluctuating, and all of these can have an impact on your salary.
But, what about those business owners who pay themselves but not a specific salary? Not a good practice, says contributor Belinda Summers on Yahoo Small Business Advisor. All your profits should be allocated for operations, emergency funds and salaries, including yours. Summers writes that you should be taking a set salary amount every month because of at least three very sound business reasons:
- You won’t use up all your finances.
- You’ll be able to measure business net income accurately.
- You’ll have emergency funds.
Read more here.
In her book, How Much Should I Charge?, Business Advisor Ellen Rohr walks small business owners through a detailed analysis to determine what their services are worth in order to, in turn, determine what their salaries should be. Some business owners may balk at taking the time to drill down into this, but here’s what Rohr says about money and worth:
The work you do takes time. And time is the most precious resource. Time reflects your life, sands through the hourglass. When you exchange your time, your life, to go to work, you should be justly compensated. How much do you need to charge to make this business worth your while?
Finally, Multiple Chicago Business Owner Jay Goltz takes a decidedly different view and even takes issue with experts who say business owner salaries should be based on fairness or value.
Actually, I think there is a simpler answer, Goltz says. I think business owners should pay themselves whatever is left—whatever is left, that is, after everyone and everything else has been paid and after money for growth and paying down debt has been factored in.
You’ll definitely want to read Goltz’s full post on the New York Times blog, You’re the Boss.
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