When starting a new business venture it is important to determine not just your employees’ salaries, but also your own. After all, when you work for someone else, it is pretty easy; you earn the salary they determine for the work you do for them. However as your own boss, you need to earn enough that you can cover your personal bills but also have sufficient funds to input into your business and deal with any emergencies. Deciding how much income you should take versus what you need for the business can be a challenge. Although there are no hard and fast rules, certain guidelines can help. Here's how to figure out how to compensate yourself for your work.
As an entrepreneur if you are in startup mode or need to expand your business, you may feel you need to forgo a salary and try to invest everything in the company. This is dangerous practice, as you may harm your personal credit and it could be detrimental to your living standards, which will eventually have a negative impact on the business. The most sensible way to evaluate your salary is to look at your business budget, income and cash flow needs. Ask yourself the following questions:
- How profitable is your company?
- What are the business's cash flow needs?
- Do you have a source of emergency funding during revenue downturns?
You should calculate your salary based upon your business revenue and personal expenses. Obviously if income is lacking then you will have to take a lesser salary, which once things improve, you may be able to compensate for with a bonus. If your small business still has a long way to go, you need to remember that money you pay yourself equates to funds that can't be used for investment and business growth. The more capital you invest in your business, the more chances it has to grow, which means that once it does, you can pay yourself more.
However, as an entrepreneur, you do not want to compromise your business's success by living in hardship! Do not pay yourself occasional large lump sums of money or the Canadian Revenue Agency may get suspicious. Pay yourself a decent amount of money on a regular basis so you can live comfortably. Build your salary into your business plan from the outset and plan for a rising salary as your business expands. Other ways to evaluate how much you should earn is to look at what recruitment ads and agencies offer as a salary to others with your job title. Extrapolate whether your wages are equal to the duties and tasks you carry out combined with the number of hours you work. It may also be helpful to speak to other entrepreneurs in similar sectors to find out what their salary. As your cash flow improves, work with your CPA to ensure your compensation is adequate and that your future financial plan takes into account your taxes and retirement.