Being in charge is one of the best things about being an entrepreneur. Being in charge is the worst aspect of being a business owner, though. I'm not sure about you, but there are moments when I wish I could complain to HR about the way my supervisor handles me. As business owners, we occasionally put up with problems like erratic revenue that we would never tolerate under a "real" supervisor.
Really? Would you be okay if your supervisor informed you that you would not be receiving the full amount you were promised if you worked in a corporate position that required you to spend 40 hours a week in an oatmeal-colored cubicle?
You wouldn't be in this case. And as an entrepreneur, you shouldn't have to put up with financial volatility, regardless of how much you love your work or even if you weren't financially ready to quit it prior. So, how should a business owner pay himself the most? Let me tell you, though.
Why You Need a Salary
You understand as a business owner that there are seasons of plenty and seasons of shortage. A stable financial position is achieved by structuring your firm so that you can pay yourself a regular wage during fluctuations in the market.
You'll know exactly how much money you're making each month, regardless of how well your business performs, so you won't have to worry about being able to pay your rent or go out with friends.
Furthermore, having a reliable source of income can help you make the best financial decisions, pay off debt, reach savings and budget targets, and feel less anxious about money.
How to Set a Salary for Yourself
The majority of small company owners immediately put any profits they make into their personal wallets. They utilize the money they earn from offering a good or service to cover other expenses like rent or groceries.
However, you are a business owner regardless of whether you manage a team or operate alone, therefore you must take your company into consideration. Rather than transferring your earnings into your personal bank account, place them in your business account and make regular, pre-arranged payments to yourself.
To Compute Your Wage, Add Up These Four Out-of-pocket Costs
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Revenue: Your total amount of earnings
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Essential Business costs: costs that are necessary for your business to function (e.g., website hosting, advertisements, personnel)
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Your Salary is the amount you regularly provide yourself.
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Your net income is the amount that remains after deducting your pay, business expenses, and revenue.
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You will now begin to utilize what we refer to as the "self-employed salary system." This is how it functions:
Your business account receives your revenue. You first put that money toward covering your necessary operating costs. Your regular salary is then deposited into your own bank account. Your net income is what's left over, which you save for unforeseen business costs or to ensure that you can still support yourself in the event of a slow month.
Important Choices to Make
Okay, so if you're prepared to begin paying yourself a wage, you need to make the following choices:
What is your lowest pay scale?
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The 50/30/20 budget, which we teach at Dow Janes, allows you to allocate 50% of your monthly after-tax income to necessities like food and shelter, 30% to wants like a night out, and ideally 20% to savings.
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Compute your monthly needs before determining what your pay should be. What is your mortgage or rent amount? What is the cost of groceries and transportation for you? You must, at the very least, earn enough to meet your basic needs.
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Give yourself enough money to enjoy yourself after calculating how much you need to survive! Like I mentioned, you should spend 50% of your monthly salary on necessities and the remaining 30% on simply living.
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Now, the idea of saving twenty percent may seem daunting to a startup. To start saving 20%, take a deep breath and consider whether there are any areas where your spending patterns could be improved. Do you frequently buy things on a whim? Do you overpay for the things you need?
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It's okay if saving 20% is out of reach for you at this time! Prioritize saving at least a little bit each month. Keep in mind that your ultimate objective is to set aside at least 20% of your income in order to support your future needs.
Read Also: Three Economics Truths for Entrepreneurs
How big of a wage buffer is your goal?
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Your income buffer is similar to an emergency fund—money placed aside for unforeseen costs in life. For instance, you would use the emergency fund to cover costs if your child needed stitches or your car broke down.
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As a quick aside, we advise business owners to establish two emergency funds: one for personal emergencies and another for business failure.
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A salary buffer functions similarly to shield you from the ups and downs in your business; the objective is to be able to pay yourself a consistent income regardless of business conditions. A salary buffer is essentially an amount of money you set away to ensure that you can continue to pay yourself your regular salary even in the event of a "off" season.
Here’s How It Works
Assume that your monthly pay is $3,000 and that your necessary company expenses amount to $500. You earn $5,000 in income in March. You deduct $3,000 for your pay and $500 for your business costs first. Your net income after this is $1,500. You added that $1,500 to your wage safety net. If $9,000 is your target salary buffer, you keep adding money until you reach that amount. Once your net income reaches your desired pay, you can give yourself a raise or utilize it to further invest in your company!
Let's now assume that there are large fluctuations in your business. That is to say, you earned $5,000 in March but just $2,000 in April. You deduct $500 for your necessary operating costs from the $2,000, leaving you with $1,500. You pay yourself your $3,000 wage with that and the $1,500 from the previous month.
Because of this, it's critical to have a salary buffer in place so that you may continue to get your regular pay even if you experience a string of unfavorable months.
You should have enough money saved up to cover your expenses for one to three months if your income swings moderately, meaning it doesn't decrease or increase by more than 50% per month. You should set aside money for three to six months if your company experiences greater volatility.
When will your salary be issued?
Employees in most firms receive their paychecks every two weeks. Although you are ultimately in charge, I would advise keeping to this. However, you are free to do otherwise. Just remember to establish and adhere to a regular period.
Important Next Actions
With all the information at your disposal, follow these steps to determine your salary:
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If you don't already have one, open a bank account for your business.
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Beginning now, transfer every penny of income into your business account.
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Determine the amount of your salary, the size of your salary buffer, and the frequency of your self-payment.
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When you're at it, set up your personal account so that 20% of your income, or as much as you can manage, goes directly into savings. This will ensure that your salary is transferred automatically from your business account to your personal account.
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Set aside time each week to review your finances. By doing this, you'll be able to keep track of the amount coming into and leaving your account and ensure that you're getting the most out of your resources.
