How Much Do You Pay Yourself?
Many company founders must face the question of paying themselves at some point. It is a difficult decision to make, because as a founder, you are concerned about every aspect of the business. You want to be fair to your investors, but you also need to pay yourself a fair amount.
BUT HOW MUCH IS THE RIGHT AMOUNT?
There is no correct or incorrect number because your circumstances and company are unique. But even if you cannot use a formula to arrive at this number, there are a few pointers to keep in mind when making a decision.
You need to understand what will benefit you and your company and empower you to turn a start-up into a fully running, profitable business.
WHEN SHOULD YOU START PAYING YOURSELF?
As the founder, you should take your pay when all the other debts of your company have been paid off. However, it isn’t enough that only current liabilities are considered. Will your company make enough revenue in the future to pay off financial obligations? Maybe you should retain some cash in the business for those times. Are there any opportunities to be grasped by investing this money back into the business now? Maybe you could put this money back into the business instead of taking a payment.
What you are left with, after paying current business debts and your own salary, is the profit earned by your company. As founder, it is your decision whether you funnel those profits back into the business or pay dividends. Either way, the profit belongs to you as a reward for the risks taken.
HOW MUCH TO PAY YOURSELF?
You will find it easier to arrive at an amount if you analyse the nature of your company. Here are some questions you can ask yourself:
1 WILL THIS COMPANY NEED INVESTORS?
If you need investors or already have investors, you may already know your amount or salary. Often, this number is discussed during negotiations. The terms of the negotiation sometimes make it possible for your investors to have the final say in how much you pay yourself.
2 WHAT IS THE STATE OF YOUR PERSONAL FINANCES?
A good rule of thumb is to ensure there is at least enough cash to keep your business running for six months, before taking anything from it. If your business has started earning before you have investors or while you yourself are not financially stable, consider putting a large percentage of that revenue in the bank.
3 DOES YOUR COMPANY NEED TO INVEST IN INVENTORY?
For any company that stocks and sells a tangible product, the cost of inventory will be high. Your growth in the early stages will depend on your ability to re-invest the revenue into buying new inventory. This is an important factor to consider.
A few important areas to be wary of:
The salary you pay yourself will have to consider factors like your own personal finances, the number of shares you own, and if your company has investors. Also ensure that it matches the market rates for the same position.
Be aware of the difference between taking a salary and using business money for your personal expenses. While it may seem like a tax-saving method to not officially take a salary, it means that you cannot use any of the money from the business for yourself. The IRS could levy heavy penalties for transactions like this.
There are many bodies and authorities that can give you a rough amount that someone in your position (as CEO or founder) should be earning. You can even search online for numbers specific to your region and your industry.