One of the most common questions we get asked at WE LOVE NUMBERS by entrepreneurs is “should I be paying myself a salary, and if so, how much should it be?”
Looking back on our start in business, I wish someone had given us better answer to this question because we have experienced the negative effects of getting this wrong.
The traditional thought behind this is that you should put every dollar you have into growing the business and that you are making a short-term trade-off now, in exchange for a big payoff when you exit.
This sounds great, however when you look at the statistics very few entrepreneurs actually get the “big payoff”.
One of the contributing factors to this is that the entrepreneur at some point along the journey gets sick of having no income.
They either start making stress-induced decisions that negatively impact the health of the company, or they simply give up and look for a secure income.
Looking back on our start in business, I wish someone had given us better answer to this question because we have experienced the negative effects of getting this wrong.
The traditional thought behind this is that you should put every dollar you have into growing the business and that you are making a short-term trade-off now, in exchange for a big payoff when you exit.
When you ask a traditional accountant this question, they will tend to provide you with advice that is heavily influenced by the tax impact.
Although tax is an important consideration, and it should certainly be considered, it should not necessarily be the deciding factor.
What’s important when making this decision is finding a balance between the future growth of the company, as well as the growth of your personal financial position.
In WE LOVE NUMBERS and Wealth Enhancers we have an overarching philosophy that the number one reason to be in business is to enhance your personal life (this can be in terms of personal wealth, but also personal fulfillment).
Let’s face it, business is too stressful to be doing if it’s not growing your wealth and providing you with a sense of reward and satisfaction. Unfortunately we don’t see this pursuit of personal fulfillment in practice enough, with in most cases, the business taking on a life of its own and ending up actually becoming up detractor from your personal life.
• Long-term success in anything can generally be attributed to the creation of positive habits.
If you want to earn a big income in the future, you need your business to be able to pay you a salary as it will be a lot easier to slowly increase the amount rather than jumping from a starting point of zero to a large amount later
• You personally need to be able to afford to live otherwise you will get disillusioned at some point and potentially give up on fulfilling your vision
• If you ever want to replace your role in the business your business needs to be in a position where it is used to paying a market rate salary for the role
• It will force you to make tough decisions about the value that team members are adding.
Too often we allow people to stay in the team when they are not performing and this is hidden by the entrepreneur not taking a market salary.
Remember every person needs to be providing a return on your investment in them, if they are not, pay yourself their salary instead
• It will highlight if your strategy is actually viable
• It means you aren’t banking on an exit. There is a common misconception that the only way you can make money is when you sell your business.
This is not actually true, if you create a great business that is highly profitable and is spitting out nice dividends every year you can utilise this money to fund other investments.
This can have a great affect of reducing your risk as in the modern day world industries can change overnight and business which might have a particular value one day might be worth nothing in the following year.
A highly profitable business will always be able to find a buyer at a great price.
So stand up, respect yourself and start paying yourself what you deserve, you will be better off for it in the long run.
Finn is a serial award-winning entrepreneur and investor. He is currently the co-founder and Chief Visionary Officer of WE LOVE NUMBERS and WE and board member of Grow My Team.
Serial entrepreneur and recognised thought leader on Gen Y and leadership, Finn is a dynamic leader and visionary who knows how to get things done. Completely connected with his purpose and values, he lives life everyday to make an impact. He is a serial award winner, including SmartCompany’s Hot 30 Under 30 twice. He is currently Co-founder and CEO of smart bookkeeping plus advice company WE LOVE NUMBERS. He is also the Co-founder of Gen Y financial advice and coaching company WE and an angel investor in a number of start-ups.
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