How much should I pay myself as the owner/founder of my business is a question we hear on a regular basis. And it’s a good question because it’s important you understand how this can affect the prosperity of your business. Why is this important to your growth? How does it affect employee morale? How does it affect lenders and investors?
Your compensation will affect your company in many ways. To discuss this intelligently we need more information. Are you a startup or a seasoned business? How many years have you been in business?
Also to consider, the Annual revenue of your business; Net profit of your business; Stable revenue or cyclical revenue. The number of employees. The number of repeat customers. Percentage of revenue from your largest customer. Days of operating cash reserve in the bank. Your personal financial net worth. And the list goes on…
Owner compensation should be commensurate with the size of your business. And it should also be a living wage. Your employees should also have a living wage commensurate with their duties. This good stress can help grow your business. It can also energize you and your team. We believe paying 10% over market is beneficial. Employees feel highly appreciated. They will be focused on delivering high value. And they will be more engaged in their job. You will get great productivity from them. Recruiters will stop contacting your staff. They will know that your staff cannot be moved. And recruiters will want to bring you, talented people. Low employee turnover will impress your customers, too. And you will gain more repeat customers.
Capital is the lifeblood of every company.
Lenders will discover the company’s high morale and see your employees are dedicated to you. They will see a high operating margin and low days of outstanding receivables. They will see a constant revenue growth trend. And they should also see constant net profit growth. These factors will motivate lenders to increase your lines of credit. This, in turn, gives you the ability to grow more.
Investors seeing these factors will want to invest in your company and their terms will be favorable. They will see high growth potential. And as a result, they will offer to open doors for you. Doors that can lead to larger customers.
So how much should you pay yourself?
Do you have a comprehensive business plan? Whether your business is new or ten years old, it needs a comprehensive business plan. This does much more than establishing your budgets. It lays out strategies and tactics for every department. It is your blueprint for growth. We have seen people underpay themselves. And people overpay themselves. Your fiduciary responsibility is to the health of the company. We believe every company should aim for a 20% net profit. And nothing lower than 15% net profit. Keep this in mind when deciding what your compensation should be. If you have any investors in your company, SEC rules and regulations then legally bind you. Taking larger salaries or bonuses can lead to legal consequences. Make certain you are in legal compliance and you will be safe.
Are you paying yourself the correct amount?
About the Author
As a serial entrepreneur who has grown and monetized four rapid growth companies, William De Temple has raised numerous forms of capital including Angel and VC Capital. He is an Angel investor/mentor and proponent of good corporate governance. He also works with companies from conception stage through $100 million and beyond in revenue by helping them learn what they don’t know.