At the core of Entrepreneurs' Organization (EO)'s mission is an unrelenting commitment to helping entrepreneurs learn and grow in every stage of business. As you embark on entrepreneurship, setting your salary as a business owner can be a challenge. We asked Emily Lazration from CoverWallet, a tech company that makes it easy for businesses to understand, buy and manage commercial insurance online, about best practices for navigating that process. Here's what she shared:
Entrepreneurship is alive and well: More people than ever are quitting traditional nine-to-five jobs to pursue their passions. A Global Entrepreneurship Monitor report found that more than 25 million Americans are starting or running new businesses.
Being the boss, especially at the onset, comes with a unique set of challenges. From figuring out health insurance, paid time off and 401(k) plans to establishing how many hours you'll spend working and setting your salary, the number and magnitude of decisions can seem endless.
Unlike the corporate world, where you discuss compensation packages with potential employers before you're hired, setting your salary as a business owner is more complicated. The ultimate number must strike a delicate balance between having enough cash flow to continue investing in business operations while also being fair to employees and investors.
When establishing your own compensation, here are five factors to consider:
1. Know what you can afford to pay yourself
Once your business is generating a profit, you may think that you should get the lion's share. Before taking a cut, consider how your company will manage current and future expenses. It's essential to include payroll, taxes, overhead costs, and funds necessary to make upgrades and invest in your business. Business growth comes at an expense, but it's essential for long-term success. An accounting firm that provides fractional business services or an accounting software program can help calculate a realistic salary after subtracting business-related costs.
2. Determine how much you're worth
If you've worked in the corporate arena, then you're familiar with how this works. During the interview and onboarding process, the job description and salary expectations are laid out for you. You can create a similar process for yourself as a business owner to figure out the range of your compensation.
Write out your responsibilities and qualifications, keeping in mind how many hours you'll work each week and how much vacation you'll take. Consider your knowledge, skills and experience, and research what salaries similar business owners pay themselves. If this information is challenging to gather, an HR consultant will be able to assist you.
3. Participate in payroll
In the beginning, it may seem smart to pay yourself only when times are good. However, getting a regular paycheck has advantages for your business and will make payroll taxes easier to manage and track. Paying yourself irregular, substantial sums may sound the alarm during a tax audit, so it's better to get a smaller salary regularly.
4. Establish a savings and investment plan
It's essential to know how to manage your business and reduce the risks that can disrupt normal operations. As part of your business plan, forecast and include the funds necessary to spur future growth. Set up a well-defined savings and investment plan to ensure that you have enough financial resources to handle future business requirements.
Growing your business can mean introducing a new product line, opening a new office, or hiring more employees. It's essential to plan for growth so you can allocate funds appropriately. When you invest in continuous growth, you're laying the groundwork to receive a bigger paycheck in the future.
5. Protect your business and plan ahead
As a business owner, your livelihood depends on the company being operational so it can provide products and services that yield a profit. But what if your business experienced a fire, for example, and you're temporarily unable to make any sales? Then you might not be able to make payroll. Business Interruption insurance can help protect you in times like these, by covering lost income resulting from fires or other disasters. Make sure your company is adequately insured so that a temporary situation doesn't lead to permanent closure.