Understanding the Fundamentals
Setting your salary as a business owner requires careful financial planning and a thorough understanding of your business’s cash flow. Your compensation strategy directly impacts your business’s financial health and sustainability.
Initial Working Capital Requirements
Before determining your salary, ensure your business has adequate working capital. Business owners should:
- Contribute initial working capital funds to the business during startup
- Build and maintain a cash reserve equal to 3 months of total expenses, including owner’s wages
- Consider operating with minimal personal compensation until working capital targets are met
Priority Payment Obligations
Establish a clear hierarchy of payment obligations:
1. Overhead Costs
-
- Calculate and set aside all fixed operational expenses
- Include rent, utilities, insurance, and employee wages
- Consider seasonal variations in expenses
- Account for irregular but predictable costs
2. Tax Obligations
Determining Your Compensation
Early-Stage Business
During the initial business phase:
- Consider taking minimal or no salary, especially if you haven’t contributed sufficient working capital, you should build up your cash flow reserve equal to 3 months expenses.
- Calculate available funds for owner compensation each pay period
- Be prepared to adjust compensation based on business performance
- Reinvest profits to build working capital reserves
Established Business
Once the business stabilizes:
- Establish a consistent fortnightly payment schedule
- Set a standard compensation amount based on:
- Business profitability
- Market rates for your role
- Personal financial needs
- Business growth requirements
Payment Frequency Considerations
Fortnightly payments are recommended because:
- Reduced administrative time and costs compared to weekly payments
- Better alignment with common business expense cycles
- Easier cash flow management
- Simplified bookkeeping and payroll processes
Financial Management Best Practices
- Regularly review and adjust your compensation strategy
- Maintain clear separation between personal and business finances
- Monitor cash flow projections to ensure sustainability
- Review compensation decisions quarterly
Building Towards Stability
Progressive steps to establish stable owner compensation:
- Build required working capital reserves
- Establish consistent tax set-aside practices
- Stabilize overhead cost management
- Implement standard fortnightly payments
- Adjust compensation as business grows
Remember that owner compensation should reflect both business reality and personal needs and should fit with the business overall budget. A conservative approach in the early stages helps build a strong financial foundation for long-term success.
Need more help? Download our free 6 Step Strategic Plan Guide.