If you own a small business or have ever thought of opening one, you have probably asked yourself how much a small business owner should be paid. While this might be a question that’s a bit uncomfortable to answer, the reality is that we all have bills to pay and an income is necessary to stay afloat.
There isn’t a perfect formula for deciding how to be paid as the owner of a small business. And in order to come up with a reasonable amount you will need to consider a number of factors, including your business revenue, business model, and your experience and skills. One recent survey from American Express OPEN discovered that nearly 50 percent of small business owners get paid roughly $68,000 per year. This amount may or may not be reasonable for you. To help you narrow it down, here is a guide that can help you determine an appropriate pay scale:
Take A Look At Your Liabilities
Begin by taking a close look at your household budget to determine what amount will be necessary to cover all of your monthly expenses. This budget should include your housing, groceries, utilities, family expenses, insurance, and savings. This total will give you a baseline for what your income needs to be in order for you to get by.
It is important to keep in mind that most startup businesses aren’t immediately profitable. You will probably need to find ways to reduce your financial needs as your business gets up and running.
Look Carefully At Your Company’s Finances
It can be exciting when your new business begins to turn a profit. But be wary of writing a paycheck as soon as this happens. It is wise to look closely at your company’s finances in order to determine how much you should be paid as a small business owner. Pull detailed financial reports from your QuickBooks system so that you get a clear picture of your company’s finances before determining an appropriate salary.
Review Compensation Models
If your company’s cash flow is just starting, you might need to consider some non-traditional methods for collecting some of the income you need. For instance, you could take out some stock options when your business is starting out that can be cashed in when your business begins to thrive. Or you could look at implementing a commission-based pay structure so that you are paid less when business is slow and more during periods of profitability.
For more established businesses it makes more sense to move towards a pay scale that is based on experience. You can do research to see what an appropriate amount is for your industry.
When your business is first starting out, sometimes the best answer to how much you should be paid as a small business owner is zero. In fact, the American Express OPEN survey showed that almost 15 percent of entrepreneurs have a second job while they get their new business up and running. If this is the best choice for you, you can either hold down a day job, or consider doing consulting work on the side while your new business works towards profitability.