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Calculate your salary as an entrepreneur

June 6, 2020


When they decide to open a business, many entrepreneurs have a dream: to reach theirs Financial independence. But how do you calculate the real value of your work if you own the company? This is an important point to keep a company’s finances healthy, especially in the early years.

Basically, your salary depends on what you spend on life, your current financial situation and the income you need in the medium and long term. Therefore, the first factor to consider is knowing what yours is personal expenses and then identify the areas where savings can be made. Once these amounts are calculated, it will be easier for you to determine how much you should make.

Calculate your salary as an entrepreneurCalculate your salary as an entrepreneur

There are two common mistakes that you should avoid: Make a payment your company can barely afford and transfer all of the business income to your personal account. On the other hand, not only will you soon despair if you avoid paying for your work, but you will also appear unprofessional to your potential partners. In this sense, it is recommended to be careful and realistic.

Make a comprehensive list of your annual expenses as detailed as possible so that you have a clearer idea of ​​how and what you spend. Warning: if you write in the red, there is a good chance that your company will do the same.

Determine how much you are worth

Once you’re done calculating your monthly expenses, you can use a foundation to determine how high your salary should be. Although there are variables that are difficult to measure, such as time investment, academic preparation or work experience.

There are two ways to calculate your value in the world of work:

1. Value on the free market. How much would an employer pay you given your knowledge and skills? Although this salary does not take into account the additional time it takes to start your business, you should not neglect the income you sacrifice as a useful reference for determining your salary.

2. Similar companies. How much do entrepreneurs (similar in size to yours) pay off in the same industry and geographic region? For comparable wages, contact other people who are in the same situation as you, or seek advice from local chambers or associations.

It should be noted that none of these methods take into account the additional work that you, the owner, do or the risk associated with starting a business. For this reason, some entrepreneurs increase their first salary by 3 to 5% to compensate for the additional responsibilities and risks. Or there are those who are happy with the idea that your company’s long-term success outweighs the setbacks.

Always think about your business

Now that you know how much you need to live a quiet life and what salary you earn, it’s time to compare the numbers against your company’s actual finances. To do this, you need to check the cash flow forecast in your business plan and make sure you have enough money to cover your own system and other operating costs.

On a hypothetical level, your cash flow should have a substantial surplus to pay your salary at market prices, reinvest funds into the company, and leave a small error rate. Unfortunately, the history of various entrepreneurs begins with deficits for a period of six months to two years. It is recommended to start with the minimum wage range and to consider a possible increase due to market growth when passing the start period test.

Another way to make your salary an incentive and you don’t suffer is to design a commission schedule. That means you can add an amount to your minimum salary based on new customers and business deals. They not only motivate you to work more to generate additional income, but also support the development of your company. These commissions will be a reward for the effort.

For example, you can also decide that if your company goes black, you will receive a percentage of the profit per business quarter as a bonus. This number may vary depending on the goals you set as the owner, personal financial needs, and the company’s philosophy to reinvest profits.

Starting a business takes a lot of patience and sacrifice. So the advice is to put the idea into practice, to invest some profits to get a salary in the medium term, as you would have with a job. When your company starts reporting profits, it’s time to reevaluate your salary. In general, this means a salary increase that is a percentage of the company’s annual growth rate.

As with your bond structure, however, there is no golden equation to determine the appropriate increase. You should calculate it according to the nature of your industry and the goals of your company.

Regardless of what decision you make in the first phase of your business, review your compensation every six months as the cash flow and capital requirements model can change dramatically as development progresses. Your salary adjustments will depend on this monitoring, which must benefit both the organization and your personal finances.

HOW MUCH DO YOU REALLY NEED?

Complete this table with your data

$ _________ rent / mortgage
$ _________ health insurance
$ _________ cost of the car (monthly, insurance and maintenance)
$ _________ Other transportation costs
$ _________ leisure activities (restaurants, cinema, exhibitions, etc.)
$ _________ food
$ _________ services (electricity, water, gas, maintenance, etc.)
$ _________ communication services (phone, cell phone, pay TV, etc.)
$ _________ credit card and department payment
$ _________ body care (gym, aesthetics, etc.)
$ _________ tax payment
$ _________ Other expenses
$ _________ total annual cost

Analyze the results
$ _________ Amount of personal savings invested to start the company
$ _________ salary or other type of income
$ _________ Result of adding the two previous concepts
$ _________ Result of the deduction of the total annual costs minus the previous sum: annual essential minimum wage
$ _________ Divide the previous result by 12: minimum monthly wage
$ _________ Total annual cost: Minimum annual wage
$ _________ Divide the previous result by 12: monthly minimum wage