Few people start their own business solely for the purpose of becoming extremely wealthy, and even fewer actually succeed in achieving this. So right from the off, it’s essential to consider how much you should be paying yourself.
When starting-up you’re likely to want to plough everything you can into making sure you give your business every chance of succeeding. But aside from the issues of needing to keep enough back for running costs and marketing etc, you need to be able to live.
And at the other extreme, don’t think that now you’re in business you really should have that executive Mercedes and that a swimming pool in the garden would be nice for the summer.
The first 12 months, or however long it is until you think you’ll be in profit, will be an incredibly difficult period and it is fair to conclude that there are more people who scrimp by than make a bucket load of cash straightaway.
But you need to be realistic. It’s more than likely that you’ve given up the comfort and security of a regular salary and you can’t be expected to suddenly survive without any income at all. You are also likely to have financial commitments that you will still need to meet, in addition to the new ones you’ll be taking on by starting a business.
It’s important to make sure you take enough to support sensible living costs. If you don’t, you’ll only be tempted to borrow more or build up another debt on a credit card - something that will inadvertently place more pressure on your business.
Starting a business is also one of the most stressful things you can ever do. Failing to ensure you have enough money to relax when you’re away from it will only increase the strain, and again, will prove detrimental to your business.
So how much should you pay yourself? The average director of a small business earns £70,000. This figure is probably higher than the turnover of many small businesses though, let alone their profit margins, so offers little insight if you’re looking to what you should be earning.
The amount of money you can expect to be able pay yourself will be dependent on the sector you’re going into and is probably the best place to start. Speak to others in the trade or to people with similar size businesses and ask how much they were able to pay themselves at first, and what they can afford now.
You should be aiming to pay yourself the same as the person in shop next door, not the same as the MD of Vodafone – as nice as it would be. If they’re not willing to tell you, try contacting trade associations who should be able to help.
Once you’ve got some idea of what others in the sector are earning, try and fit a similar figure into your financial estimates and see if it’s viable. If it’s not, then it could be there’s a problem with your business plan as a whole and it is something you’ll need to address before you take the plunge.
The key is to plan ahead. You need to consider, right from the very start, how much you need to live on and what you can afford to pay yourself. If you don’t, then you’ll soon be tapping into resources you hadn’t accounted for and immediately putting your business on the back foot.
Remember, be realistic. Don’t be afraid to treat yourself every now and then, but don’t go overboard. You’ll need every penny of your startup funds and profits to put back into the business to help it grow. But don’t under calculate what you can live on either. Be honest about what you need to ‘get by’ and incorporate that into your costs and your business plan.