Entrepreneurs and business owners often struggle with the idea of drawing a salary at the start up of their ventures since their focus is on making the business profitable as quickly as possible. The reality is, though, you still have to make an income as the owner for the same reasons you did as an employee: expenses, livelihood and lifestyle.
So what’s the best way to determine your starting salary and still have your business make money at the same time?
Just like with your personal finances, a budget for your business is the foundation for its economic success and growth.
Step 1 is to calculate all of your expenses. If you’re estimating, be sure to err on the side of caution and guess higher than what you think you spend. Surplus is always better than deficit!
| Minimum Salary Range Worksheet | |||
| 1. | Rent/mortgage | $__________ | |
| 2. | Health insurance | $__________ | |
| 3. | Car payment | $__________ | |
| 4. | Other transportation | $__________ | |
| 5. | Car insurance | $__________ | |
| 6. | Recreation activities (includes gym/club dues/restaurants) | $__________ | |
| 7. | Food | $__________ | |
| 8. | Utilities | $__________ | |
| 9. | Misc. living expenses | $__________ | |
| 10. | Credit card payments | $__________ | |
| 11. | Child care | $__________ | |
| 12. | Entertainment | $__________ | |
| 13. | Other expenses | ||
| 14. | Total Annual Expenses | $__________ | |
| 15. | Portion of personal savings allocated to startup costs | $__________ | |
| 16. | Salary or other ongoing income | $__________ | |
| 17. | Sum of lines 15 and 16 | $__________ | |
| 18. | Subtract line 17 from line 14 for Bare Minimum Annual Salary | $__________ | |
| 19. | Divide line 18 by 12 for Bare Minimum Monthly Salary | $__________ | |
| 20. | Total from line 14: Minimum Annual Salary | $__________ | |
| 21. | Divide line 20 by 12: Minimum Monthly Salary | $__________ | |
| Lines 19 and 21 represent your Minimum Monthly Salary Range | |||
| $_________ | |||
After you’ve determined your monthly expenses, you’ll want to determine your value: what you would be paid working for another company based on your time, talents and experience.
Since it’s common for startups to operate at a loss for the first six months or even up to two years, it makes good business and financial sense to initially pay yourself the minimum salary you can live with comfortably. You can always increase your salary as your business grows. A good formula to follow would be as Brian Honigman suggests in the Wall Street Journal, stating that founders should take 20 percent of the profits and reinvest 80 percent.
Starting your own company is exciting, but it can also be equally as exhausting. If you’re ready to take the next step toward creating your own future or have already begun the process, why not leave the financial details to the professionals so you can focus on building your dream YOUR way? It’s at least worth a conversation, and we at JMV Financial Services are eager to help you succeed.