Why paying yourself a salary will pay off in the end

It’s not uncommon for business owners to sacrifice paying themselves a salary, particularly when starting out. While this might be sustainable in the short term, if you don’t start paying yourself a market based wage your business model is fundamentally flawed for the long-term.

Here’s four steps to ensure your business pays what you are worth:

1. Value your time and your talent

Remember: your salary is not your business’ profit. It’s also not what’s left when all the bills are paid.

A salary is your ROI (return on investment) for all the time, effort and, let’s be honest, stress, you’ve invested in building the business. Hopefully, you love your business and what you do, but at some point you need to realise job satisfaction isn’t going to pay the mortgage.

2. How much should I pay myself?

So, what’s a market based wage? Look at it this way: If we took you out of the business right now and you had to employ someone to do what you do, what would they expect to be paid?

Just to be clear – this figure is not your revenue/sales target. Your revenue target should be your salary + cost of goods (all the things you pay to keep the business running) + 30%.

3. Check your hourly rate

Now you have an annual salary figure. If you run a service based business, your hourly rate is also an important financial metric. Have you ever calculated your hourly rate? Let’s hope it’s not less than minimum wage! Use this simple formula to work out your current hourly rate:

The cost of your service less any direct costs incurred by you to deliver that service, divided by the total number of hours it takes you deliver that service from start to finish.

For example:

Service Fee ($350) – Costs ($25 fuel, $65 supplies) = Profit ($260)

You can now use this to calculate your hourly rate.

Profit ($260) / the total number of hours you spent completing the work (12hours) = $21.66 per hour

Time sheets are a great way to keep track of exactly how much time you are spending on each client or project. There are lots of tools you can use to track your time.

4. Increase your prices

You knew it was coming, because deep down you know you should have increased your prices ages ago! But what if your clients walk away?!

For most business owners, this is their biggest fear. Take a minute to come to grips with this concept right now – IT WILL HAPPEN. And it is not a bad thing. Are clients who complain about your price really the clients you want to be dealing with? There will always be clients looking for the cheapest price, product or service. There will also always be clients who value what you do more than the price you charge. So, take a deep breath and rework your prices the next time you quote your service.

And one last thing: Don’t forget Super!

Unlike when you are an employee in a company, when you work for yourself you are not required to pay yourself Superannuation. You need to factor in at least an additional 10.5% to your salary. Put it in your budget so you are diligently putting it aside every week or month – your future self will thank you.

If you need help calculating how much you should be paying yourself, contact our team today.