The two
major ways entrepreneurs can take money from their business is through draws or
by receiving a paycheck. The type
of entity in which their business is set up will determine which method can be
used. In either case, entrepreneurs need to be careful not to shortchange
themselves.
Especially
if you’re running a service business, it’s easy to initially think you can do
well with a similar hourly rate that you earned as an employee. Here’s a quick list of five elements
that should be included in the compensation of every entrepreneur:
1.
Competitive pay
If you
were doing the same work for a company that hired you, what would your pay
be? Are you making at least market
equivalent or better? A lot of
times, as entrepreneurs, we tend to focus only on this piece of our compensation
when we set our pricing, and that’s a big mistake. It’s only 75 percent of what our total pay needs
to be.
2.
Profit.
As an
entrepreneur, you take extra risk when you own your own company, and you should
be compensated accordingly. Your
capital is tied up in your business and should be earning a good return in
addition to your reasonable compensation.
3.
Benefits
Employees
get vacations, health insurance, and bonuses; and you should too. This should be part of your
compensation package as an entrepreneur.
4.
Taxes
Although
our individual taxes are not deductible as business expenses, we need to
compensate for them so that we’ll have enough cash for our living
expenses. It’s a huge chunk
too. We work about three and a
half months every year, just to pay for our taxes.
5.
Retirement plan
When you
work for yourself, no one is going to fund your retirement for you. Although the Social Security program
helps a lot of seniors, it’s up to you to set additional money aside for a
comfortable future.
Complete Compensation
Your
compensation should include all of these components. If it doesn’t and you feel like you can’t afford to pay
yourself that much, then your pricing might not be reflecting all of these
items correctly, you might have a volume problem, or your business model may
need some adjusting.
It’s
normal to take a smaller paycheck the first few years as we’re building our
businesses, but if you’re still doing it after several years or constantly
having cash flow issues, then something may be wrong.
If you’d
like our help in this area of your business, please reach out and let us
know.
Make sure
your future is bright and financially secure by including all five components
in your entrepreneur compensation.
