Paying yourself a salary as a small business owner: If your business requires your free labour, is it truly viable?
As a small business owner, you may have encountered difficulty in paying yourself a salary, or at the very least a steady and predictable salary. This is not an uncommon problem. Many struggle both with setting their salary at a particular level and with then consistently paying themselves that salary.
There are many schools of thought on the first point. Some suggest that the small business owner should set their salary at a competitive market rate. You pay yourself the opportunity cost of your opting out of the job market to create your own opportunity by compensating yourself competitively with what you would earn if you put your skills on offer on the market. Alternatively, you could compute what you need to sustain your desired lifestyle. It is ultimately up to you and depends on what stage the business is in and what philosophy you subscribe to. You obviously do not want to bankrupt your business and should bare the long term in mind, as well as other factors such as perceptions from potential investors, should you seek that route to grow your business.
However, more interesting is the second point, the consistency with which you pay yourself that salary once you have set it. Some entrepreneurs find it difficult to pay themselves, being committed to seeing the business scale and often laden with feelings of guilt with what they perceive as putting themselves before the needs of the business. When the business is very early stage, this is understandable, as the business may be barely covering all other costs. However, as the business begins to stabilize, it is important that the entrepreneur value their contributions and build a culture of paying their own salary. Not paying yourself is essentially valuing your contributions at zero. Also, there may be many reasons why you started your business, but I trust sustaining your own livelihood was one of the reasons. Your personal and family well-being should not become completely sidelined by your business goals but should ideally be supported by them.
The traditional way to think about whether or not to pay yourself as a small business owner is to wait until profits are tallied after all other expenses of the business have been covered and then pay yourself out of these profits. The tension from this profit pool tends to be what portion to reinvest in the business versus extract. This is well and good, and is often a very prudent approach that can enable you to focus on long term sustainability. I challenge you to take a slightly different view. You can start to consider your skills and time as an input and therefore a direct cost to the business. If your business requires your free labour, is it truly viable? If you are currently unable to pay yourself for your services, perhaps it is time to consider whether or not your business basics are truly working. Perhaps you margins are too thin, or your product is sub par, or your operations are not lean enough, or it could even be that you are over-investing in the future of your business at the expense of your present well-being.
Decisions about paying your salary are not easy. Just make sure you are deliberately making the call and not letting it happen to you that you are scrapping along unnecessarily. It is indeed a tough balancing act.
Tell us your personal philosophy on paying your own salary as a small business owner.