Now that you’re the boss, how do you determine what you’re worth and what the size of your paycheck should be? You have the freedom of setting your own salary. That’s great in theory, but it’s not as easy many Arizona business owners imagined it would be.  

 

 

Consider this:

 

• Do you pay yourself what you made at your last position?
• Is your paycheck enough to cover living expenses with a bit of money left over?
• Do you pay yourself barely enough to survive in order to put all your profits back into the business?

 

These questions are tough to answer. If you pay yourself less than what you’re worth, or don’t draw a salary at all, this paints an unrealistic portrait of the viability of your business.  

 

Tips to determine what your salary should be:  

 

• Determine what you need: Just as you’d accept a job based on whether the salary could help you meet your living expenses, you should do the same with setting a salary as an entrepreneur. Determine your financial situation, living expenses and whether you have to — or want to – draw from your savings account. Put together a complete list of your monthly expenses – everything from mortgage and car payments to lunches with clients, morning coffee and gym memberships. If you don’t have enough money coming in to meet personal living expenses, chances are your business will slip into the red as well. Once you have your expenses calculated, multiply that by 12 and this will give you the minimum salary you’ll need to draw to meet monthly expenses.

Some individuals opt to draw the bare minimum salary needed to cover personal expenses. If you have income from another source, this could be an option during your start-up phase. Remember that you need separate business and personal bank accounts.  

 

• What are your skills and talents worth? To calculate your market worth, think about what salary you’d be drawing if you were applying for a job in your area of expertise. What are your skills and experience worth on the open market?  What do owners of like-firms pay company principles? Check with trade associations or small business development centers to check comparable salaries. 

 

In some instances, entrepreneurs will look at market-based salaries and then add 3-5% on top of that to offset the risks and responsibilities of business ownership. These salary calculation methods don’t take into account the amount of hours you’ll be taking on as a business owner.

• What compensation burden can the business bear? Now that you’ve determined the salary that you need to live on and the salary that you deserve to draw — based on skills, experience and research —  you need to figure how much the business can afford. Look at the cash flow projections to make certain you have enough money coming in to cover your salary in addition to operating expenses. Because most start-ups initially operate at a loss there is very little margin for error with cash flow. Hopefully, your cash flow will be large enough to pay the salary that you’ve determined you need, but that might not be the case.  

 

In the beginning, you may want to base your salary at the low end of the spectrum until your business makes it to the break-even point.  You could award yourself a bonus based on a percentage of profits on a quarterly basis. When your business is consistently profitable, then it could be time to re-evaluate your salary. 

  

There really is no set-in-stone equation to determine the appropriate salary. Whatever decision you make, take time quarterly to reassess the cash flow situation. 

 

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