The five-year plan, the elevator pitch, and which swanky address for your new office when you’ve made it big. You’ve got everything figured out. Well…everything except for your own wages.
As an SME Business Owner, you undertake four kinds of activities for your businesses, and you deserve to be paid well for every one of these:
Worker – Doing everything and anything
Manager – Co-ordinating.
Director – Making decisions.
Owner – Investing.
You’re doing a lot, so are you getting the sexy wages you deserve? Here’s how you should figure out your own salary.
A. Time Reward
Step 1 – What do you do?
It might be hard to actually work out exactly how much time you spend wearing each of the above four hats.But if you look back on the last year, overall, you can most likely work out a rough average that splits up how you spend your time.
Step 2 – What are you worth?
For the time split from Step 1, establish what you would pay someone else to do for each of these roles.Don’t forget to include overtime, sick leave, holiday pay and all the other benefits that your staff gets (the things you most likely never take). The calculation should show less for worker wages than manager wages, and a bit more for executive wages – added together this will constitute a fair salary for your overall time.
B. Money Reward
Step 3 – What is at stake?
Consider how much money you have invested in your business (e.g. money for equipment, start-up costs). Add up all of these to get a total and then work out a reasonable annual interest payment for making this investment. If you are not sure what “reasonable” is, use your current annual credit card rate as a guide and multiply that by the amount you have invested into your business.
NOTE: If you have borrowed money from the business, as well as invested into the business, then offset any loans to you against any loans by you to get to a net total before calculating the interest.
C. Total Reward
Step 4 – What is your Sexy Wage?
What you deserve is a combination of rewards for the time you spend and the risks you take. Total up your answers from Step 2 and Step 3 to get a reasonable approximation of what you are worth. A really sexy wage will also include some extra “bonus”!
i.e. you are adding the amount you are due in salary, to the amount of reasonable interest you are due, to work out what is a fair return for what you contribute in both money and time; that is the basic value you should be paid, or you may as well sell up and get a job because then you would get the same money for no risk. The key here is the “sexy” part – the extra bits you get paid as a result of the special X-factor you bring to your business.
Step 5 – Are you getting enough?
Measure what you take by:
a) adding up what you receive from your pre-tax business profit each year in drawings, perks, superannuation, salary etc….You don’t have to show anyone but yourself so be extra honest and include all those office purchases you took home “accidentally” and any “business lunches” you might have had – don’t under-estimate the rewards you really take by leaving this out.
b) Adding the total from a) to your post-tax business profit, you’ll calculate the total rewards you are receiving right now! (Your Post Tax Profit is the number at the very bottom of your Year End Profit and Loss Report).
Yes, it is a little hard to put a value on the happiness (and trouble) our business and customers bring us each and every day. But think about it, many employees have rewarding, happy jobs too.
Not all of the profit has to end up as cash in your pocket. Re-investing in your business is also a form of taking profit because it increases the value of the asset you own and you can receive more in the end when it comes time for you to sell, though this strategy comes with its own risks.
Are you paying yourself well, or are you missing out just so you can dupe the taxman? Maximise your profit, get your tax accountant to worry about the compliance and admin work, and make sure you reward yourself as well as possible – just like Gina Rinehart, or Rupert Murdoch or any other really successful business owner you can think of. You are doing the work and taking the business risks, so only you can make sure that you are paid fairly for all of it!
Channel 10’s The Project call on her when they need someone who speaks accounting in language understood by us ‘normal’ business people and because her analogies include “buying a Maserati from your next door neighbour for a really good deal”! As Group Financial Controller for the top 100 ASX listed firms, in addition to operating her own highly lucrative practice, Eve Blackall is the author of ‘Profitology’ the ultimate guide to deciphering your P&L so you can give your own business a profit-making make-over.