How to calculate an entrepreneur’s salary
How much do you pay yourself at the end of month? You sweat, fret and keep your business rolling. You deserve to be applauded for all the time, effort and energy you put into ensuring that the business is successful. But, what about monetary benefits? Who decides your take-home salary?
If you are the sole owner of your business, many people might wrongly assume that all the profit goes right into your pocket. A few others might imagine that you take home a huge chunk of the revenue. On the other hand, if your company is hardly making any profit but backed by funds raised from venture capitalists (VCs), you’d have to settle down for a monthly compensation that you and your investors have agreed on. Is this calculation really that simple? Let’s find out.
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Many entrepreneurs and small business owners often put themselves last when paying out cheques. They pay every other stakeholder– suppliers, associates, consultants and employees – and all utility bills first, after which they pick a small share from what’s left over. This method can be difficult for business owners who are still surviving on bootstrapped funds or are not making enough profit.
No two entrepreneurs are faced with the same situations, but the question remains: how do you determine how much your salary should be for running the business?
Assess your job
The first step is to understand what it takes to do your job. How much would you have paid someone else to do your job? Scrutinise your tasks and responsibilities without any bias. You can take the help of a human resources expert. Ask yourself these questions:
What value do you bring to the company?
What is the nature of your contribution to the business?
Is your role managerial or administrative?
How will your contribution influence the business in the long run?
Lastly, ask yourself, what would you have made if you were working as a consultant for another startup?
Assess your business
Entrepreneurs can choose to withdraw salaries depending upon the growth of their businesses. For instance, if your company is in its early stages, consider paying yourself just enough to cover your monthly expenditure. It would be wise to invest the remaining earnings towards the company’s growth. If your company is in a growth mode, you can choose to get a little more out of the profits to improve the quality of your life or to make some sound personal investments. You need to look at which phase of its life cycle your business is in to decide your salary.
Use benchmarks
Taking into consideration your experience and skills, use websites such as Salary, Quora and Glassdoor to find out what others in your position and geographical location earn. What would you be paid by another employer? How do you think your investors would determine your take-home salary? Even if the market standards are high for your job, sacrificing a little in the first couple of years would enable you to use more funds towards attaining bigger goals of your company.
Assess your needs
Here are a few monthly payments most of us have to take care of:
- Rent/mortgage
- Insurance premiums
- Fuel/conveyance expenses
- Recreational activities
- Utility bills
- Food and monthly household expenses
- Debts and CC payments
- Investment towards childcare and education
- Miscellaneous living expenses
- Total annual expenses
- Salaries or income from other sources
- Personal tax savings investments
By adding 1 to 9, you will get an account of total annual expenses. Minus 11 from 10 and add 12 to the score. The final calculation should be the annual minimum take home salary
Pay yourself just as you pay your other employees. Your salary should be credited to your bank account on the same date as your employees get theirs. Although the final amount might vary depending upon the profit your company has made in that particular month, remember that it is best to grow steadily with your company.