One small business owner salary is not enough. Pay yourself three!

As a small business owner you relate to your business in many different ways. My mission today is to convince you to pay yourself for three of those ways. And, having done that, to show you how to calculate them. 

Now don’t be like that! I can read your mind you know and I hear you saying ‘how the (expletive of your choice) can she expect me to do that when I can’t even work out how to pay myself once!’ Well I’m glad you asked – please allow me to show you how.

Small business owners wear many hats – sales manager, operations manager, customer relations, finance manager, marketing manager, webmaster, social media guru and the list goes on. Gerber in his book The E-myth talks about your role as Technician, Manager and Entrepreneur.

I like his distinctions but it’s not how I would divide your role up for payment purposes. In fact there is a lot I like about that book. It provides a good allegory on small business development but that is for another time.

For the purpose of remuneration I would divide your roles into:

1. Service Provider or Product Procurer
2. Chief Executive Officer / Director
3. Investor

Service Provider or Product Procurer

In a bricks and mortar business the chances are you started the business because you do the work of the business be that a lawyer, hairdresser, personal trainer, mechanic.  As Founder of a Startup you will probably be performing a specific role for a large part of the time in addition to running the business.  This could be in product development or sales.  As the business grows you will probably step back from this specialty and concentrate on leading the business.

For this role you should pay yourself a market rate of pay. We discussed one way to do this in a previous post.  For instance if you spend a lot of time on sales you should pay yourself whatever you would pay someone to replace you in the role.

Once you have decided on the market rate of pay for this role make sure you index this figure to inflation or just choose a flat percentage increase to award yourself each year. Alternatively you can test the salary in the marketplace, say every three years or so, to make sure it’s realistic.

The bottom line is you should pay yourself the salary you think you would have to pay someone to replace you in this operational role on a day-to-day basis.

Chief Executive Officer

You should pay yourself a fee to reflect the work you do in overseeing the running of the business.  It includes all the management stuff and the many hats you wear as owner operator of a small business.

If you operate your business from an incorporated legal entity there will be obligations imposed on you by the company legislation in your country.

These could include things like making sure

• Proper accounting records are kept
• Adequate insurance cover is in place
• The business is solvent
• All federal and local laws relating to your particular business type are being kept
• Your products comply with safety standards
• Your workplace complies with occupational health and safety legislation and much more.

Apart from these legal obligations CEOs  are often involved in strategic planning and provide a big picture focus on the performance of the business.  They provide leadership to all areas of the business.

This is probably a part time role and the remuneration should reflect this.  It is probably a higher rate of pay than what you receive as a service provider. You could ask your accountant or lawyer to find out what is appropriate.

Investor

The chances are high that if you have started a small business you have invested cold hard cash into it in addition to your blood, sweat and tears.

And you know what?

You should get a return on that investment.

If you have already made the decision to build a brick wall between your business and personal finances then you will know exactly how much you have invested. If you haven’t taken this step yet then it could take you a while longer to add it all up – but go on, do it, cause it’s important!

Ok all you need to do now is to set a rate of interest you should be paid on the amount invested.

The easiest way to do this is to pick a bank and look at what they would charge you if you took out a business loan, or had an overdraft facility with them. You can add a fixed percentage over and above that rate if you want to but don’t go overboard on this; you need to keep it on a commercial basis.

Check with your accountant to make sure you comply with any tax legislation in your country as this might be considered to be a special loan because it is from a Director.

There are plenty of online calculators on the banking websites that will help you work out a principal and interest repayment rate if you work out how many years you want to pay it back over. Otherwise I usually calculate the interest at the end of each quarter.

If you can’t afford regular repayments of the principal, then just knock a bit off at the end of each quarter, depending on how the business is performing. This just makes the interest calculation maths easier.

Why should business owners earn these three incomes?

The short answer to this is ‘because it is the sensible thing to do.’

No, this is not just the lunatic ravings of an anal retentive accountant who wants to add more and more complexity to something that should be straightforward.

It is commercial advice from someone who wants you to have a business that is glorious!

Here’s 4 reasons to treble your small business owner salary

1. There may come a day when you want to step back from the operational side of running your business and employ someone else to do it. If you have always been paying yourself a commercial salary then you know your business is robust enough to be able to do it. That makes affording it a ‘no-brainer’, as they say in the classics!
2. As your business grows you may want to appoint a Chief Executive Officer to provide oversight to the operational side of the business freeing you up to spend time on strategy and business development.  Many businesses have found this has propelled them to the next level.If you are paying yourself a CEO fee from day 1 it sets a value on this type of work and prepares you for the day when you pay others for their advice and knowledge.
3. Paying yourself interest is also  a no brainer. If any other person or financial institution lent you money you would be paying them interest. So why should you be the exception to the rule?
4. It will force a commercial robustness on you that will stand you in good stead.  Yes you may not be able to pay yourself the three types of remuneration all that time but you must have that as your goal if running a commercially sound business is one of your goals.

So it's over to you now.  What do you think?  Would you like to earn three lots of income from your business?