3 Considerations in Deciding How Much to Pay Yourself

3 Considerations in Deciding How Much to Pay Yourself

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Deciding how much to pay is always a fun subject – not because it is money, but because the range of thought processes around this concept varies so widely that it is almost laughable.

The reality is that there is really no right or wrong answer, only different circumstances for each unique situation, which means that you will not be able to use an online calculator to solve the equation for your situation. .

Related: When should you start paying yourself?

But you need, or at least want, to pay yourself, right? So there are a number of areas you will need to consider while determining what makes the most sense for you and your business. Let’s take a look at a few of these areas so that you can be better prepared to make the decision when the time comes.

1. Do you already have or intend to have investors?

If your answer to the first question is yes, then it may have already been answered – this point is often determined in the course of negotiation and, depending on how the transaction has been structured, your investors may have the ability to validate what you pay for.

If you do not yet have investors but intend to do so, this becomes an area of ​​particular importance. From an investor perspective, we will want to see that you pay for something, depending on where you are in business of course (if it’s just a concept or a pre-launch, clearly you don’t take distributions).

You should do enough to not be completely 100% stressed about how you are going to make the rent, but not so much that you get rich on your salary. While the number is important, the frame of mind you have is just as important, if not more, so treat yourself and don’t start with a six-figure salary.

Related: How can I (legally) support myself with funds raised for an early start?

2. What is your cash flow situation?

Like I said, if you’re in the pre-launch phase or just in the concept phase, you may not be taking any salary – unless you’ve raised a lot of money, then you probably did decide this subject for you by your investor (s).

If you have started, started generating income and you are without investors, it is important that you give your startup some legs before you start to withdraw money from the business. I would say that, in a perfect world, you create a track of at least six months of operating expenses, in the bank, before taking any distribution having an impact.

At the same time, you have to pay yourself something. There is a psychological importance to taking a paycheck, even if it is small, which can easily be adjusted as your business grows and your cash flow becomes more predictable.

3. Do you need to take inventory?

If your business sells physical products, you will likely have to reinvest heavily from the start to build your inventory as you grow – which means there won’t be a huge amount of capital left to pay. . It’s just the reality of an inventory-based business.

However, there will come a point when you will have enough inventory on hand and, assuming your margins are reasonably high, you will have a greater cushion between what you need to reinvest and your income – which will allow you to take more distributions. important without running the risk of bleeding your business dry.

Related: Do you have investors? Now, how to manage your salary.

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