BrainTrust Query: Salary = Success
Through a special arrangement, presented here for discussion is a summary of a current article from Getting Personal About Business, the blog of Zahn Consulting, LLC.
American Express Open recently conducted a study that was reported in the Boston Herald that discovered that half of the business owners did not collect a salary. Of those that did, 44 percent were paying themselves a salary of less than $50,000.
This may be in part a result of the temporary need for a business to reduce spending to survive, and may not be totally reflective of the total compensation that the business owner takes from the business. However, it is still a startling insight that indicates just how difficult many entrepreneurs are currently finding it.
While there may be times when a business owner may make the decision to invest their salary back into the business, if it happens more commonly than not, it is time to reconsider the business model. While conventional wisdom would point out that it seems wise to "put the business first," in fact, it is best to put yourself first. If the business owner is not taking care of his or her own needs, then the business will become something that is regretted and viewed as drudgery, obligatory, and more of a drain than something that sustains the business owner.
While there may not be a chart one can check to see how much salary one should receive -- as each business and business owner are so individual and unique -- the business should be able to spin off salary on a consistent and regular basis. Conversely, it is also important for the salary the owner takes not to be so high that it cripples the business and becomes an impediment to long-term success.
Generally, a company's profit can be used as a guideline to set the owner's salary but, ultimately, whether or not a business owner can take the money will depend on accounts receivables and cash-flow. If an owner is borrowing money to sustain the business over a temporary shortfall, then the question of whether to pull a salary becomes problematic.
But the business plan should have been built to include sufficient income for the business owner to live on. Failing to meet that threshold is indicative of an issue with the business model, executional practices, and strategies.
Discussion Questions: When should and shouldn't an entrepreneur take a salary? How should an entrepreneur gauge his or her salary level?