How to Pay Yourself as an Entrepreneur
So you own your own business which means you’re the boss, and as the boss – you get to determine how much money you make. Awesome, right? Considering how often I get asked this question, it seems to be more stressful than awesome for most business owners.
If you ask the average entrepreneur what they make, they’ll likely tell you their profits for the year. “I made six figures last year” often means the BUSINESS made six figures. But what did you, the business owner pay yourself? And how do you come up with that number? And what should your business goals be to align with your personal salary goals?
This is going to look different for everyone but I wanted to break down how we’ve figured this out and worked through the seasons of crazy and the seasons of slow. When I first started, I realized quickly that I would have seasons where I would make a lot of money and then seasons where it would be nothing and I knew that in order to be smart with my money, I wanted to figure out a way to make sure I felt comfortable in all seasons.
MY JOURNEY
For the first 3 years of my business, I matched my corporate salary (even when the business was making triple that) because I knew that was the amount we needed to make ends meet and I wanted to build up our business savings, so every two weeks I would pay myself $1,200 which was what my paycheck was when I worked in corporate America. If you don’t already have this number figured out like I did, add up all of your personal expenses for the year and divide by 12. This is the minimum you need to make to get by when you’re starting a business.
When your business grows and is consistently profitable, it’s time to re-evaluate that salary. This could mean you take a percentage of profits or a percentage of annual growth in the business. If you’re in a seasonal business, it might make more sense to keep your salary the same and pay bonuses instead. Maybe you want to skip the salary boost and invest further in your business.
So let’s break this all down more simply with steps to follow:
THE FIRST STEP: HIRE AN ACCOUNTANT
I can talk all day about what I do for my unique business type and industry, but the best advice I can give you is to work with an accountant from the very beginning. One of the smartest things I’ve ever done is hire an accountant before I even started my business to set things up correctly. They also do my bookkeeping and so every month they are able to send me a profit and loss statement and expenses so I keep a good pulse on what’s going on financially in my business. Accountants are worth every penny, there’s one in every city and whatever excuse you have for not hiring one yet – squash it and go find one today. If I can find one in a village of 1,200 people, you can too.
GET A BUSINESS BANK ACCOUNT
This will probably be the first thing your account has you do to get setup correctly, but I want to warn you that you’ll need to get a business bank account. No more paying for business expenses out of your personal account and buying that new wardrobe out of the same account. In order to know our business numbers, they need to be clean and in their own account and not mixed up with everything else. This will make tax time so much easier as well.
DON’T FORGET ABOUT THOSE EXPENSES
Remember, what you ultimately will pay yourself with comes out of your business account AFTER business expenses. Calculating what you need to make personally cannot match the total revenue of the business. It may seem obvious, but make sure you have a spreadsheet calculating each and every expense for the business and add that to the “need to make” number when determining your pricing.
WHAT ARE YOUR BUSINESS GOALS?
What you pay yourself is going to be different depending on your goals for the business. Are you in startup mode and each and every dollar is invested back into the business? Or maybe you’ve been in business for awhile and are looking for a more consistent compensation plan that you can maintain for years to come. Maybe you’re thinking about selling your business in which case the influx of cash would come after the sale (and not in the monthly payroll).
Make sure you’re keeping your long term goals in mind when setting your salary and not copying someone else’s pricing which is based on an entirely different set of priorities, life circumstances and goals.
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