Don’t Make a Critical Startup Mistake – Pay Yourself First


When you are starting a small business, there never seems to be enough money to cover all your immediate concerns. Many expenses are non-negotiable, such as buying merchandise, paying rent and paying employee salaries, so you may try to save funds by cutting down on your own salary. Although this seems like an obvious place to save, it can actually be a big mistake.

Although it may seem counter-intuitive, “pay yourself first” is advice that is often heard from financial experts and successful entrepreneurs.

Although it may seem counterintuitive, “pay yourself first” is advice that is often heard from financial experts and successful entrepreneurs.“Many business owners who bootstrap their companies feel like paying themselves is a luxury; however, it is a necessity for the success of your business,” states Susan Payton from Yahoo Small Business.

There are many benefits of paying yourself first. The most obvious and unpleasant reason is that your business might not survive, and if it closes, the salary you paid yourself may be the only benefit you receive from it.

All entrepreneurs need to protect their personal finances during the course of doing business. Just as they need to purchase sufficient insurance and keep separate bank accounts and records. Paying themselves a wage is an important part of achieving that goal. Paying yourself a fair wage allows you to afford your personal expenses so you don’t have to rack up credit card debt for things like groceries and monthly bills.

Furthermore, giving yourself a paycheck can even help you perfect your business model. If you can’t afford to pay yourself a decent salary, then your business probably isn’t profitable enough to expand and you should consider tweaking your business model. Therefore, your salary is a good barometer of how your business plan is performing and when you need to go back to the drawing board.

So how much should you pay yourself exactly? While there are many online calculators that can help you figure that out, it is easy to get a rough idea by considering what a fair wage would be for someone else doing your job.

“Owner compensation should be set at market rates for the job that he or she is performing. If the owner had to hire someone to do the job that he or she is executing, how much would the business have to pay to attract and keep such a person?” asks Doug and Polly White, owners of Whitestone Partners Inc., on Entrepreneur.com.

Paying yourself a good salary can also give you flexibility during times when your cash flow is tight. Just because you should pay yourself, doesn’t mean it must be the same each month. This means that if you need to hire an employee or find extra cash for another reason, you can temporarily decrease your salary. In this way, your salary gives you a dependable source of wiggle room in your budget.

Be sure to pay yourself and reap the long-term benefits.

 

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