What's the right small business owner salary? Determining this number is among the most daunting challenges of successfully operating a new or established venture. In July 2015, a host of small business owners answered two key questions: How do I determine what to pay myself? What are the implications of taking money out of my business? Here's what they had to say.
At a bare minimum, business owners need to pay themselves enough to cover personal bills and expenses. Jason Parks, owner of The Media Captain, says, "I try to pay myself modestly, so I know there will be enough cash left in the business for other endeavors. Whether that is hiring a new employee or investing more in advertising, I try to keep a nice influx of cash in the business bank account."
A small business owner salary should also be determined at least partly on the needs of employees. "I pay myself a low salary (under $50K) because I want to make sure employees are always paid first and the company has a rainy day fund," says Aaron Udler, president of OfficePro Inc.
Steven Sashen, cofounder of Xero Shoes, notes that "anything we take for ourselves is money that's not available for purchasing inventory, hiring other talent or paying for the various activities that generate revenue. At the same time, if we're taking so little that we suffer, it reduces our productivity and increases our stress. Suffice it to say, our employees often make more than we do."
Other business owners base their decision on the strength of their enterprise. "Some think it's OK to take money out of the business before all expenses are paid, therefore driving the business's bank account into the negative," says Sam Carter of Challenge Coins 4 U. "Assuming you have employees, this can be a dangerous move and can hurt financially and personally."
Eboni L. Truss, CEO of The Purpose, Passion + Profit Group, uses the "third rule." She puts 33 percent of net revenue back into her business for operations, 33 percent toward marketing and the final 33 percent toward herself. "If you begin taking money out of your business before it is financially feasible, your business will definitely suffer," she says. "Taking money out too soon can also cause you to miss opportunities. For example, a door may open for you to invest in a venture that would grow your business. However, if you have no financial capital set aside to take the opportunity, you'll have missed a potentially lucrative endeavor."
"In the short run, a business owner needs to pay himself enough money to cover personal bills and expenses," says Daniel Decker, co-owner of One Marketing. "If the business doesn't provide at least that much, it's not going to last long."
As with any other business decision, the right choice will depend on the unique circumstances in your company and industry. When in doubt, work with a trusted advisor to outline a strategy.
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