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You're the business owner and you set the budget, so the size of your paycheck is entirely up to you. But while the freedom of setting your own salary sounds great in theory, in practice most business owners find it a tough call. Should you pay yourself what you need to cover expenses? What your business can afford? The salary you left behind to launch your business?
Your best bet is to factor in all three, and more. For your business to succeed you might consider taking a temporary drop in income. On the other hand, paying yourself far less than you're worth, or nothing at all, paints an unrealistic picture of the viability of your business for you or potential investors.
Here are the factors to consider before determining exactly how much to pay yourself.
Your salary will depend on your living expenses, financial situation and comfort level with drawing on personal savings. First, put together a comprehensive list of your expenses [see worksheet below]. Be sure to include all annual, quarterly and monthly expenses. These include everything you'll spend money on, such as your rent or mortgage, car payments, car insurance, credit cards with outstanding balances, gym membership and grocery bills. Underestimating personal expenses is one of the biggest mistakes a new business owner can make. If you slip into the red, chances are your business will, too.
|6||Recreation activities (includes gym/club dues/restaurants)|
|9||Misc. living expenses|
|10||Credit card payments|
|14||Total Annual Expenses|
|15||Portion of personal savings allocated to startup costs|
|16||Salary or other ongoing income|
When you've added up your annual personal expenses, divide that number by 12 to come up with the monthly salary you'll need to receive. Next, decide what portion of your savings you'll feel comfortable drawing on during the early stages of your company. These must be separate savings from the funds you'll use to launch your business. If you plan to keep your job, add your annual salary to the personal savings figure. Subtract this number from your total annual personal expenses and divide by 12. This gives you the minimum monthly salary you'll need, even if you choose to supplement your startup salary with personal savings or employment income. Now you have a range that runs from the minimum salary needed to cover all your personal expenses to the bare minimum salary you can afford to take by supplementing your income. This is your minimum salary range.