3 Considerations in Deciding How Much to Pay Yourself
Deciding how much to pay yourself is always a fun topic -- not because it's about money, but because the range of thought processes pertaining to this concept vary so widely that it's almost laughable.
The reality is there's really no right or wrong answer, only circumstances that differ for each and every unique situation, which means that you’re not going to be able to use an online calculator to solve the equation for your circumstances.
But you do need, or at least want, to pay yourself, right? So you’ll need to take a number of areas into consideration while determining what makes the most sense for both yourself and your business. Let's look at a few of those areas so 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 already be answered -- this point is often determined as part of the negotiation and, depending on how the deal was structured, your investors may have the ability to sign off on what you’re paying yourself.
If you don’t yet have investors but intend to, this becomes an area of particular importance. From an investor standpoint, we’ll want to see that you are paying yourself something, depending where you are in the business of course (if it’s just a concept or pre-launch, clearly you’re not taking distributions).
You should be making enough so that you’re not completely stressed 100 percent of the time about how you’re going to make rent, but not so much that you’re getting rich off of your salary. Although the number is important, the mindset that you possess is equally important, if not more, so do yourself a favor and don’t start yourself out at a six-figure salary.
2. What’s your cash flow situation?
Like I said, if you’re in pre-launch or just the concept phase, you may not be taking any salary -- unless you’ve raised a bunch of money, then you’ve likely had this topic decided for you by your investor(s).
If you’ve been bootstrapping, begun to generate some revenue and are without investors, it’s important that you give your startup some legs before you begin taking any noticeable amount of money out of the company. I would suggest that, in a perfect world, you create a runway of no less than six months in operating expenses, in the bank, prior to taking any impactful distributions.
At the same time, you do need to pay yourself something. There’s a psychological importance to taking a paycheck, even if it’s small, that can easily be adjusted as your company grows and your cash flows become more predictable.
3. Do you need to carry inventory?
If your company is one that sells a physical product, you’ll likely need to re-invest heavily early on to build your inventory as you scale -- which means that there won’t be a terribly large sum of capital remaining to pay yourself. That’s just the reality of an inventory-based business.
There will, however, come a point where you’ve got enough inventory on hand and, assuming your margins are reasonably high, you’ll have a larger cushion between what you need to re-invest and your revenues -- which will allow you to take larger distributions without running the risk of bleeding your company dry.