One of the greatest windfalls you can ever experience professionally is the ability to work for yourself. Most wealth comes from saving, and accumulating wealth, and then investing it properly. Wealth gets created by ownership, also. Where you have a stake, or equity in something, much like a home. And a small business does that, for sure. But it comes with huge work and sacrifice, in terms of your time and effort you put into the business. And it’s not always rosey. You have times when you wonder whether you’ll even be able to pay yourself, during those lean times where you’re still growing your business.
2Balancing A Budget
For many people, until you have consistent sales coming into the business it’s tough to take an income. You have to do some planning and simple math. Then you need to budget that amount into your income and cash-flow projections so that you know how much operating capital you’ll need. What happens when you reach break-even and grow beyond that point? There are many factors that go into the equation. You need to balance your needs against what you feel you are worth, what you need to get by in terms of earning an income, what the business will be able to sustain, and how your income as well as the business will be taxed.
There are two methods you can use to determine your pay during startup phase when you first open up your own shop. The first is paying yourself enough to meet basic living requirements. Depending on your situation, that means enough income to cover your bills, food and other miscellaneous living expenses. Might wanna get used to the idea of striking all other discretionary items from your life for a while. Get used to just the bare necessities. To begin planning your pay, you need to put together your own personal financial statement that lists all your living expenses. This may be one of the most difficult things you’ve ever had to do because you don’t want to leave anything out. You want to make sure that your income from the business will be enough to cover your expenses. And often times, when starting a new business, it’s simply not.
4Determining Your Salary
Determine your salary during the planning stages of startup is important because you need to include your income in the financial statements you’ll produce in order to obtain financing for your business – presuming, of course, you’re looking for financing to run your business. Even if you are financing the venture yourself, you need to have this information in front of you; otherwise, your overhead won’t be practical nor accurate. Any bank or investor looking through your plan will check your financials very carefully. They’re going to look at these projections to make sure you can repay the loan from the profits of the business. If they hold equity in the business, they need to determine how great a return they can expect from their investment. Simple business on their part, so don’t forget that. And now you know.
Just because you’ve reached break-even, that doesn’t mean your company is profitable, or is even stable. If you’re paying yourself just enough to get by, raising your salary is going to increase your overhead which will require a greater amount of revenue from the business in order for expenses and income to match. In other words, you’ve just thrown your business into the red again. If you’re paying yourself your basic net worth, then you shouldn’t need to raise your salary, at least for a while. After you’ve reached break-even, the best method to increase your pay is to tie any income above your fixed salary to the growth of the business. Therefore, if the company grows 10 percent during the first quarter after break-even, take your base salary and add a 10 percent bonus to it. And you might consider taking out any profits of the business, after you reach X-level. So keep all this in mind as you’re considering starting your own business.