One of the common motivators for starting up your own business is financial control. It goes without saying that this is a double-edged sword as you’re not only getting the reward; you’re also responsible for taking the risk.
That paragraph doesn’t really do the situation justice. Being your own paymaster is a huge incentive for people who feel they are not currently being paid what they feel their skills are worth or earning enough to justify the crazy hours working for a large corporation can require.
The risk is also a big deal. Anyone taking on financial control of a business should be aware that the top three reasons new businesses fail are lack of cash, lack of cash and lack of cash.
So is the answer simply to adopt a bit of modesty and humility and not to pay yourself too much? Well, not exactly. Conscious of the cash flow issue, many people seriously underpay themselves in order to ‘get by’. This is understandable in the early days and we have talked about survival budgets in the past, but you will have to start paying yourself an appropriate salary eventually.
Without allowing yourself a salary/dividend based on your worth your financial assessment of your business could become skewed. Adjusting your earnings to prop up the company for too long does your business a disservice.
When you’re in a position to pay yourself a set amount you have a clear, objective view of how your start-up is faring. This is also of great importance to anyone else viewing your business. Look at the situation from a potential investor’s point of view. If the seemingly healthy company they are looking at only appears successful because the owner isn’t paying themselves (or not paying themselves the appropriate, comparable reward for the job they perform) then the company is something of a mirage. Equally, an investor would be reluctant to support financially the growth of your business if he or she thought that you were funding an extravagant lifestyle and not contributing yourself to the growth, so finessing the balance between these two extremes becomes critical.
Yes, survival budgets – real bare minimum survival budgets – are a reality for many, but you need to try to remove yourself from that situation as soon as possible; as alluded to above it’s not a move to wasting or spending money flamboyantly, but in order to move forward and grow – if you’re paying yourself well below market rate then it will be difficult to attract any staff (who will probably have less “upside” than you, by way of compensation) when the time comes to expand.
Hopefully your initial investigating will have informed you what others working in your sector are earning. Whatever approximate figure that is (which needn’t be at the higher end of the scale) should really fit into your financial estimates as viable. If not, you may need to revisit your business plan and in particular your financial model.
Paying yourself appropriately also reminds us of the other side to this coin and where I began this article. You deserve a reward. Starting a business is one of the most stressful and difficult things you can choose to do with your life. If you’re paying yourself to relax or even eat enough then the strain only increases. Reward yourself and rest yourself. You will benefit and so will your business.