When should you start paying yourself as a small business owner?
It’s a question that a lot of people who own their own businesses have to ask themselves, but finding out how and when to start paying yourself is a difficulty that a lot of people have trouble answering.
When you first start out as the owner of a business, you are embarking on a path that is filled with discovery and, frequently, grief.
No one goes into business for oneself with the intention of doing volunteer labour.
The fact is, however, that this tends to occur far too frequently, with business owners feeling forced to pay down all bills and reinvest any excess into their organisation before extracting a meaningful paycheck for themselves.
This is regrettable.
The situation shouldn’t be like this at all.
When it comes to owners of businesses, the question of when they should start paying themselves should have just three possible responses. They are as follows:
- When the company is able to finance it, it will be implemented
- When your work is incorporated into a product or service
In truth, no single solution is appropriate for every organisation.
Every business and business owner has a different schedule for paying themselves. Some firms are successful right away, while others take years to even break even, let alone become profitable.
Not all business owners are involved in the day-to-day operations of the company. So, when should they be compensated?
Other business owners may work full-time in the company and hence require a living wage.
Some business owners anticipate not being paid for the first 12 months and have laid aside personal monies to help them get by. Others intend to establish a firm from the ground up, sell it, and profit from the sale.
When it comes to deciding when and how to pay yourself, every business owner must evaluate their unique circumstances. As a result, it’s critical to consult with a bookkeeper or accountant before making this decision to ensure that nothing is overlooked.
There’s usually more to it than the ‘when.’ You should also address the question, “Why should I pay myself?” ‘How should I compensate myself?’ says the narrator. ‘How much should I pay myself?’ and ‘How much should I pay myself?’
Why should you pay yourself?
When considering the logic behind choosing to be paid as a business owner, there are a variety of advantages and disadvantages to consider.
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There are likely to be many more on both counts, but here are the basic arguments for and against so you can figure out how to best define your own scenario.
Considerations for paying yourself:
- Paying yourself helps maintain an accurate picture of the costs associated with running your firm. It is common practice for owners of businesses to fail to account for the cost of their own labour. As a result, they may underprice their goods or services because they fail to factor in the cost of labour.
- If it can be demonstrated that the owner of the firm has been paid a salary, the value of the company may improve.
- At some point in time, you will require a return on the investment that you made, and paying yourself is an efficient method of achieving this goal.
- If you put forth a lot of effort, you should be rewarded monetarily for it. It may assist you in maintaining a positive attitude. Working as many hours as many business owners do without seeing any reward might be demoralising after some time has passed. Even if you begin with a very little sum of money at the beginning of the business and then gradually increase it as the firm grows, this can add to the feeling of accomplishment and pride that comes with owning and working in a business.
- The company gets accustomed to paying for you, which means that if you decide to leave the company, take a step back, or find a successor, it won’t end up becoming a new expense that will need to be discovered.
Considerations against paying yourself:
- You run the danger of putting the company in jeopardy if you remove funds from it before it is in a position to support those expenditures. It is essential to maintain a strong cash flow when a firm is in the starting phase or the growth phase because this is when the majority of the business’s costs are incurred. Receiving a wage means taking money out of those crucial funds.
- There is a loss of potential earnings when you pay yourself. When money is paid to the owner of a company, that money is not allocated to other aspects of the company’s growth that could benefit from it, such as expanding the client base through marketing.
How should you pay yourself?
You should structure your own compensation in a manner that is advantageous to both you and the company.
In addition, there are many different approaches to financing your own expenses. It is not required that you pay the same amount on a consistent basis at all times. You may, for instance, make payments in instalments or on an “as necessary” basis.
You may even think about waiting until the end of the year to see how the company is doing and then taking a lump sum payment based on how much the company can afford to pay out.
How much should you budget to reimburse yourself?
There are a variety of perspectives that can be taken on this issue.
What you get paid can be influenced by a number of factors, including worth, cash flow, replacement value, and compensation for risk and investment. All of these factors can be taken into account.
In the end, it is up to you to determine the rate, but you should use extreme caution to ensure that the decision you make does not hinder the expansion or continued viability of the company.
The following are some items to take into consideration:
- How much money does your company has
- What do you think a reasonable wage would be? (not too low, not too high)
- You’ll require
- What it is that you want
It’s critical to think about whether the money you’re paying yourself would be sufficient to find you a substitute. If it isn’t high enough, you may want to raise it.
Do you have a job that pays at least the minimum wage? Have you considered the possibility of retirement? You might want to consider why your wage is so low. Is it really necessary for it to be so low?
Increasing one’s income is one of the numerous reasons people start a business. It’s critical to recognise and reward your efforts and risks. Those benefits may slip away if you don’t pay yourself.
Solicit advice and devise a strategy for when and how you will begin compensating yourself.
Don’t leave it too late, whatever happens.
Three pieces of bad advice for startups that you should avoid.
While the vast majority of this advice is well-intentioned – and not all advice is appropriate for all startups — we spoke with three startup founders about advice that proved to be total nonsense.
1. On paying for advice
“We would advise any early-stage founders out there not to pay for guidance.
“Not with cash, and certainly not with equity.” You need to have the best grasp of the problem you’re solving and the customers you’re targeting at [that] early stage.
“No one can provide great enough advise to replace that research when you’re very early on, and there are lots of awesome people who will help you without asking for money.”
Lloyd also advised founders to disregard conventional thinking that says you should always go back to existing funders before seeking further money.
This meant you were essentially validating the same idea in front of the same audience, she explained. Furthermore, asking for money on a regular basis isn’t always a good idea.
“Your early investors put their faith in you against all odds; repay them by not dipping into their pockets at every chance,” Lloyd added.
2. On how much cash you need to get started
Elliot Costello, co-founder of social enterprise YGap, said the most common piece of poor advice he’d received (apart from being told that his wild ideas wouldn’t work) was that a startup needed a lot of money to expand.
He explained, “What I perceive is ‘you need money, you need money, you need money.'”
The disadvantage of having access to finance (although that’s not a bad problem to have) is that it deprives businesses of the irrational thinking that can arise out of necessity.
“There have been a number of firms that have made it without having a lot of money in the bank because it allows for invention and creativity,” Costello said.
“I’ve seen a lot of advise that says you need a lot of operating capital to be successful, but having cash on hand may often impede innovation because you have that safety nett.”
“I’ve never seen a non-profit with too much money, and I believe we would do things differently if we did.”
3. On pitching (too) early and (too) often
Meanwhile, Demetrio Zema, a co-founder of Law Squared, claimed that entrepreneurs are frequently advised to pitch early in their life.
“We see a lot of ‘pitch for investment early,’ which I think is a bad idea,” he remarked.
“It’s about consolidating your team, your concept, and making sure you have something viable to pitch to investors.”
“When you’re dealing with other people’s money, it’s risky to go in with a half-baked plan.”
He claimed that part of the motivation to secure funders as rapidly as possible stemmed from a desire to get to market as soon as possible, which Zema agreed was bad advice.
“There’s this idea about trying to get to market rapidly so you can either succeed or fail quickly – but I’m not a big believer in failing quickly,” Zema explained.
“I believe that when you’re playing with other people’s money, you shouldn’t immediately run to the market or chase more investment as rapidly as possible.”
“First, you must validate the concept. That doesn’t mean you need a lot of customers, but it does require talking to people who aren’t connected to you about your idea and finding a market for it.”
Five tips for developing a business idea into a real venture
Having a good business idea isn’t the same as having a successful company. Benjamin Kluwgant explains the greatest approaches to making your concept into a reality in this post.
Have you ever had a light bulb moment while working your day job and come up with a brilliant business idea?
If that’s the case, you’re far from alone. Every now and then, anyone with even a smidgeon of entrepreneurial energy in their veins comes up with a business idea that they consider pursuing.
Unfortuitously, many of these concepts will never be put into practise because of impediments such as a deficiency in financial resources, an absence of necessary knowledge, or a reluctance to give up stable and full-time employment. There are occasions when the issue is nothing more complicated than a lack of follow-through. After that, nobody takes any note of the suggestion, adding it to the millions of other examples of wasted potential.
Moving from the phase of having an idea to actually creating a company is nothing short of a battle uphill with an unending amount of hurdles in the cases where such an idea is taken seriously and constitutes a small percentage of all cases.
These inherent problems, however, can play a big role in establishing a long-lasting firm with strong foundations provided the appropriate techniques are applied and the idea is tackled with a disciplined mentality.
1. Having reasonable expectations
According to Tsen, it is critical to connect your expectations with the reality of the situation before embarking on the road from idea to the full-fledged firm: starting a business is far more likely tiptoeing through a minefield than it is taking a stroll in the park.
“It’s difficult to build a corporation,” Tsen told The Pulse. “In many ways, it’s a near-impossible undertaking that demands superhuman concentration and dedication.” It’s a gruelling process that requires years of dedicated effort and is riddled with pitfalls and landmines.”
2. Be persistent and keep your sights set on the goal
Tsen suggested a number of crucial strategies that can assist in making the adjustment more palatable. This is predicated on the assumption that you are able to embrace the “mission impossible” type of endeavour that lies ahead.
The first strategy is a simple one: do all in your power to avoid becoming distracted.
Based on his experience observing founders of early-stage businesses go through this transition, Tsen stated that it is “easy to get distracted” by the next “bright item” that appears to make your organisation more successful. He came to this conclusion as a result of his observation of this phenomenon.
“Shiny items” may be alluring, but they also have the potential to be exceedingly hazardous. It is essential to maintain concentration on establishing a solution to the problem that you identified in the first place, particularly in today’s highly competitive environment for new businesses and innovative ideas.
According to Tsen, the primary attention should be placed on the development of a single solution that is “a magnitude of order better” than any other solution that is now available in the market. This is the only way to compete with other “great companies.”
“The initial objective is to have an obsessive concentration on what your clients need and how you can solve their problem,” the author writes.
3. Validate your claims and provide early responses to challenging inquiries
No matter how amazing your business idea is, there will always be fundamental issues that need to be answered when you first start out.
Tsen advised individuals just starting out in company to “try the hard ones early” and not be afraid to take on the obstacles head-on.
“Will a buyer, for example, truly pay you money for the product?” Tsen wondered. Is it true that this product is ten times better? What is your planned path to get there if it isn’t (which is acceptable at this point)?”
Don’t ignore the basics or assume you’ll “just know” whether something will work. You’ll be scrambling for answers when it’s too late if you begin your firm without first answering those questions.
4. Balance client feedback with the company’s vision
When validating a business idea, Tsen encouraged people to strike a healthy balance between their mission statement and the input they receive from potential customers. This was another strategy that they could utilise.
When you are in the validation stage of the process, you have no choice but to take into consideration the feedback that you receive from your target market. Feedback can occasionally lead to distractions, which puts your vision for the future of the firm in jeopardy.
Tsen gave the following piece of advice: “Have a company vision, and then complement it with what your customers tell you.”
If you’re able to pull that off well, you’ll put yourself in a position where you’re not just respected but also stand out from the crowd.
5. Do not be afraid of failure
In the beginning phases of an endeavour, a company has a significantly increased probability of failing. Even the most ambitious people have a good chance of failing spectacularly if they venture into the unknown, test and adapt their offering, and remain on top of developments in their field.
As we saw earlier this year with SpaceIL’s abortive attempt to land on the moon, successful stories are always filled with plenty of difficult times and disappointments.
If you are able to maintain focus, find the confidence to ask the difficult questions, strike a balance between your vision and the feedback of your customers, and are willing to accept failure, there are not many things that can prevent you from building a high-quality business.