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What salary should you pay yourself?

What salary should you pay yourself?

As a business owner, passion for your business is brilliant, but passion alone doesn’t pay the bills. How do you determine what to pay yourself each month? And how do you balance this against what your business can afford? It’s always a good idea with big decisions like these to consult with a financial or business advisor you trust and who knows your individual circumstances, but here are some considerations to keep in mind.

What’s your role worth in the job market?

To keep your business safely in the black, it can be tempting to pay yourself a lower-than-average salary, promising you’ll give yourself a pay rise when you can afford it.

This might be the wisest decision when your business is in its early stages and funds are still tight. But what about later, when revenue is more stable? In this case, it could make more sense to pay yourself what an outsider would expect to be paid for taking on the same role.

Asking, “How much should my salary be?” based on recruitment ads and salary surveys will give you a more accurate picture of the real financial position of your business. It also makes it easier to hand control to an outsider or second in command – who will expect to be fairly compensated – if you have to leave your post temporarily.

What’s left in the bank?

The other side of the argument is that you should pay yourself last – in other words, after you have already paid your employees, reinvested money back into the business to meet growth targets and serviced any debt. Basically, your salary calculation is based on whatever is left over at the end of the month. If you want to grow the business as quickly as possible, this could be the better option.

Achieving the right balance

Paying yourself last may also be the only realistic option if you run a ‘micro’ business, where the profit margin is slim and revenue is low. For larger businesses with 10 or more employees, however, it can be hard to find a satisfactory answer to the question of personal compensation versus investment in the business and its employees.

Ultimately, you should ask yourself why you wanted to be in business in the first place. Was it to enjoy the financial perks? Or was it to build something of significant value and reap the rewards later?

Whatever the case may be, compensating yourself fairly is usually better for business in the long run, as well as for your own peace of mind.

One of the first steps in deciding on your salary is to understand how much the business can afford. Learn how to analyse your cash flow and predict the future health of your business.

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