BrainTrust Query: Salary = Success
By David Zahn, Managing Partner, Zahn Consulting,
Through a special arrangement, presented here
for discussion is a summary of a current article
from Getting Personal About Business,
the blog of Zahn Consulting, LLC.
American Express Open recently conducted
a study that was reported in the Boston
Herald that discovered that half of the business owners did not collect
a salary. Of those that did, 44 percent were paying themselves a salary of
less than $50,000.
This may be in part a result of the temporary need for a
business to reduce spending to survive, and may not be totally reflective
of the total compensation that the business owner takes from the business.
However, it is still a startling insight that indicates just how difficult
many entrepreneurs are currently finding it.
While there may be times when
a business owner may make the decision to invest their salary back into the
business, if it happens more commonly than not, it is time to reconsider the
business model. While conventional wisdom would point out that it seems wise
to "put the business first," in fact,
it is best to put yourself first. If the business owner is not taking care
of his or her own needs, then the business will become something that is regretted
and viewed as drudgery, obligatory, and more of a drain than something that
sustains the business owner.
While there may not be a chart one can check to
see how much salary one should receive — as each business and business owner
are so individual and unique — the business should be able to spin off salary
on a consistent and regular basis. Conversely, it is also important for the
salary the owner takes not to be so high that it cripples the business and
becomes an impediment to long-term success.
Generally, a company’s profit can
be used as a guideline to set the owner’s
salary but, ultimately, whether or not a business owner can take the money
will depend on accounts receivables and cash-flow. If an owner is borrowing
money to sustain the business over a temporary shortfall, then the question
of whether to pull a salary becomes problematic.
But the business plan should
have been built to include sufficient income for the business owner to live
on. Failing to meet that threshold is indicative of an issue with the business
model, executional practices, and strategies.
Discussion Questions: When should and shouldn’t an entrepreneur take a salary?
How should an entrepreneur gauge his or her salary level?