One question that all startup founders asks themselves is whether they should draw a salary or not. If the business is running well and there are no problems with cash inflows, then this might seem an irrelevant issue, not requiring much thought. But it assumes significance if the company is relatively new or is going through a rough period.
The decision whether to pay oneself a salary or not is a personal choice governed by many factors. The temptation to postpone your payments in order to facilitate cash flow might be tempting, but industry experts recommend that, as an entrepreneur, you need to make a conscious decision to pay yourself a salary. Here is why:
Image : shutterstock
Right now, you might be financially sound and secure. You have that nest egg tucked away, and there are no major financial obligations to fulfil. But this can change at any time as we cannot predict what the circumstances will be a few months down the lane.
Depending on the kind of business you are into, there may be tax benefits you can claim for the company when you pay yourself a salary. Not taking a salary might just end up cutting into your company’s profit, and that is something you want to avoid.
Getting a salary will act as a morale booster and motivate you to work harder to raise your income and revenue further. More than the amount, the fact that you are being paid is what is important.
Paying yourself projects a positive image of your company and yourself which is what prospective investors wish to see. It will send the message that you are committed to ensuring the growth of your company.
If you are the only founder, there might not be much of a complication. But if the company has multiple founders, everyone will have to be compensated equally. The decision on what salary is to be paid will also have to be decided with the involvement of all founders.
As a founder, any salary you get is sure to draw scrutiny from various quarters including employees and investors. Make sure that your salary is not too high or too low. A high salary will eat into your company’s funds besides setting the wrong tone. By drawing a salary too little, you are undermining yourself. If your company has funding from investors, then you should be able to give yourself a modest salary without it having any negative impact on the company’s balance sheet.
The best way to calculate the right salary is by estimating what is required to cover your basic living expenses every month. Check out what you would be paid if someone were to hire you as an employee. By factoring in the responsibilities you carry out in the company and considering what you would end up paying if these tasks were outsourced can help you arrive at a reasonable figure.
If you are an entrepreneur struggling with the dilemma of whether or not to pay yourself, hopefully this makes it easier for you.