Calculating Your Salary May Be a Challenge
Author: Keith Huggett
You wouldn't think that one of the most difficult decisions that comes with owning a business is figuring out how much to pay yourself, but this is the case for many business owners. The challenge for most people is not taking a salary that is too high, but one that is too low. Taking a lower salary at the start can help keep expenses down and free up more cash to invest into the business, but what happens if the business cash flow can't support a higher salary in the future? Planning ahead and using projections can help you avoid this problem.
So how do you decide the appropriate salary for yourself as a business owner? The tips below can help you come up with a reasonable number:
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Calculate your annual expenses: If you don't make enough to cover your personal expenses, you won't be able to focus on growing the business. Add up everything you spend in a year and don't forget to include all the little details. In this case, overestimating is better than underestimating. Divide the number by 12 to calculate your minimum monthly salary. Subtract any other sources of income or savings you intend to use.
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Figure out what you're worth: Owning a business does not mean that you should be unreasonably poor. Find out what other business owners in your industry typically make and do your best to match that. You can also base your salary on what you would get if you were employed by another company at the same level.
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Find out what the business can afford: You know how much you need to make each month to cover your expenses, and you know how much others in comparable positions are making, but the most important number is the one that is actually possible. Use cash flow projections to see how much surplus you might have. Do this on a periodic basis as your business grows and adjust your salary accordingly.
Owning a business does not mean that you have to go it alone. Contact The Tax Office, Inc. today for help with bookkeeping, tax preparation and business advice.
