Many people become entrepreneurs because they don’t feel they’re getting paid enough for the work they do in the corporate world. Ironically, they may find themselves even lower on the salary scale when they open their own business.
“They’ve made hundreds of thousands, even millions, for people, and just made a salary, so they go into business for themselves,” says Jack Chapman, author of Negotiating Your Salary.
“But then it becomes difficult to know how much to take out of the business, especially in the early days.”
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When trying to figure out your salary, consider how much your time is worth, whether it’s a good time to take money out of the business, and whether there are alternative ways of making ends meet for now. These 10 questions can help you settle on the right amount for you and your business:
10. What do other people in top management make?
Chapman says you can find some pay parameters by checking out various online sites to see how much other executives are being paid. He recommends Salary.com, which gets its data from larger corporations, PayScale.com, whose information comes from the executives themselves, and Glassdoor.com, a free jobs and career community that includes employee-generated content.
“While these sites are not targeted to entrepreneurs,” he says, “you can find a business similar to yours, see what people are getting paid, and use it as a benchmark for what to pay yourself.”
9. How will other employees react to my salary?
Start-ups, often strapped for cash, sometimes attract and retain key employees by offering them equity and other types of non-cash compensation. If that’s the case for you, your employees may react negatively if you collect a fat paycheck.
Employees – and investors – expect the founder or founders to apply the same compensation policies to themselves, says Joan Farre-Mensa, assistant professor of business administration at Harvard Business School. “If the entrepreneur is drawing a big salary, this can be interpreted as lack of confidence in the future prospects of the company, negatively affecting employee morale.”
8. How many jobs am I doing?
If you’re acting as CEO, purchasing agent, salesperson and social marketer, you deserve to be paid for those jobs, or at least a portion of what it would cost to hire people for those jobs, Chapman says. “If say you’re doing jobs that would cost you R1 000 000 to hire out, you might keep 50% of that for yourself – if the business can handle it.”
7. What is my cash flow, now and in the future?
Your salary will, of course, depend on cash flow – not only current cash flow, but even more important, future cash flow, says Steve Trojan, a CPA who specialises in small businesses at SMT & Associates, an accounting firm in Crystal Lake, Illinois.
He recommends that before starting a business, you develop financial projections to help understand how much cash flow will be generated over time, how much will be needed to expand the business, and how much might be available for your personal expenses.
This will help you understand how much money you should set aside for living expenses before starting the business and whether you might need a part-time job in the early stages of your start-up.
6. What does my company’s growth rate allow me to take in salary?
If a company is growing rapidly, you need to put any profits in the business and limit your salary. If you have a R12 million business that’s poised to become a R24 million business, it needs every bit of the capital it’s generating.
“Growing businesses are generally cash flow neutral or negative during their formative stages, and as a result, there’s no cash to take out,” says Douglass Tatum, associate professor at Middle Tennessee State University. “The entrepreneur has to reinvest into the business.”
5. Can my family afford to live on a small income – or even no salary?
Young entrepreneurs with no dependents can more easily limit their living expenses than those with children or other dependents, Farre-Mensa says. This is why many first-time entrepreneurs choose to start their businesses when they have fewer responsibilities.
But if you happen to be an entrepreneur with dependents, make sure that your co-founders and early employees understand your circumstances and don’t interpret your salary as a lack of commitment to the company.
4. Can I receive some of my compensation in a form other than salary?
Once the business is on its feet and the owner is able to start taking money from the business, the structure of these payments can be important from a tax perspective. If during the start-up days, the owner loaned the company money for working capital, he can start to pay himself back when cash flow allows, Trojan says.
“Making payments to owners via shareholder distributions – if the company is an S-corporation – also can reduce taxes, but you have to be mindful of the tax requirements that active owners must take a reasonable salary.” While the tax man has not defined “reasonable compensation,” a common definition is a wage you would pay another person for the job you are performing, he says.
3. Should part of my salary be based on the distribution that other investors share?
There can be some serious conflicts with investors and shareholders over compensation, but these issues can be minimised if a significant portion of the entrepreneur’s cash compensation is based on the company’s performance, Tatum says.
If the company has professional investors, they’re going to make sure the compensation plan rewards the founder’s performance appropriately, with anything leftover going back to the investors. If the investors are friends and family, they should be given the same courtesy, Tatum says.
“In other words, treat them as if they had appropriately negotiated their investment positions as professionals. This could significantly reduce some of the tensions around the issue of compensation. This is a good idea even if the investors are unsophisticated and have not pushed the issue with the entrepreneur.”
2. Do tax considerations enter into my compensation?
Tax evasion is obviously illegal, but tax avoidance is good business, Tatum says. A good tax advisor can develop ways for an entrepreneur to increase or defer compensation in a tax favourable manner. Be sure to consult with a tax expert sooner than later, Tatum says.
“More times than not, an entrepreneur shows up at the last minute with ideas for his accountant, and it’s too late to implement them. A little bit of thought ahead of time can save a lot of money.”
1. Have I put down in writing what I expect to be paid?
It’s critical to document compensation agreements when you have to answer to other people – whether business partners, a board of directors or investors. “If you’re at a board meeting and someone says, ‘You should get 10 to 15 percent of the profits,’ ask them if they mind if you put that in writing,” Chapman says.
“Write it down, get it notarised and file it, so there are no questions later. The clearer you are about money up front, the better off you will be on the back end.”
What Is The Real Cost Of Your Time?
Are you not fully appreciating the real cost of your time, and leaving money on the table as a result?
More often than not, the true cost of time, that is, the hourly rate of each person working on a project has never been accurately calculated and therefore not factored correctly into the quotation price, including overheads that are paid annually and profit. Owners forget that they too are selling time in managing the project, but more often than not, include the cost of their time as part of the profit.
Many business owners do not realise that part of what they do is sell time and they do not consider calculating how much their hourly rates and those of their employees are. For example, take a small artisan ice-cream producer who has two employees who mix the ice-cream ingredients and place the mixture into ice-cream machines all day, while the owner spends half of every day supervising this process.
The employees are selling time and the owner is selling a half day of her time every day. They are not just selling ice-cream. These costs should be factored into each ice-cream tub’s selling price.
In simple terms, hourly rates are calculated using the employees’ annual remuneration package, including benefits such as medical aid, provident fund contributions and travelling allowances, company contributions to statutory obligations and overheads plus profit divided by the average labour capacity in a year.
To simplify this, here is the equation:
Annual Remuneration + Benefits
+ Company Contributions
+ Annual Company Overheads + Profit
If the owner of the business is providing the service personally, the remuneration should be market related and relevant to the years of their experience as well as the skill level and risk attached to the actual service being provided. For example, in the medical profession a cardiac surgeon provides more complex services and carries more risk in his work than a general practitioner and would therefore have good reason to demand a higher fee or hourly rate.
Depending on the industry, some element of an employee’s day will be unproductive as it is unreasonable for any person to be productive for a full eight hours, particularly in a high-skilled industry.
That leaves just 14 working days a month when averaged over a year. That’s right, less than three weeks a month.
Make sure that you recalculate your hourly rate and that of your employees each time there is a change in remuneration or benefits. The remuneration paid to employees who do not directly generate income, such as receptionists, administrators and sales personnel should be included under overheads.
If the hourly rate costing is correct, each employee’s true productivity can now easily be measured against the income they directly produce or have contributed when compared to their remuneration package. This provides useful information when conducting employee appraisals and addressing pay rises.
Related: How to Get the Better of Debt
If your business is selling a service or any part of a service, when last did you ask your accountant to assist you in checking your hourly rate and that of your employees?
EasyBiz QuickBooks – Business Management That Balances
EasyBiz QuickBooks – By Entrepreneurs, For Entrepreneurs.
EasyBiz QuickBooks are known for their business management software that makes accounting easy and the reason for that is EasyBiz was once a start-up business too.
Developed from the entrepreneurial spirit of Gary Epstein who wanted to offer small to medium businesses the opportunity to take ownership of their business success and growth by offering them an accounting package that would help them to achieve these goals.
EasyBiz have been there – done that, and are striving to share this knowledge and experience with their loyal customers to ensure that they bypass all of the possible pitfalls associated with the transition from being a growing business to a big business.
QuickBooks’ history in South Africa started 22 years ago, in 1994, when it was part of the Brilliant Accounting Software Company. In 2003 Softline Pastel merged with Brilliant and a year later QuickBooks was set up as a separate company within Softline.
Gary Epstein saw the value of this global brand and seperated from Softline by way of a Management Buy Out in 2005. Since then, guided by passion and a belief that this software truly lives up to its promise of making accounting easy, the company has gone from strength to strength in the South African market.
With over 50 000 users in South Africa and 63 Million around the world, QuickBooks has indeed gone from a relatively small business to a force to be reckoned with in the accounting and payroll software space.
This growth is not surprising when one considers the innovative and comprehensive nature of QuickBooks’ business software solutions. QuickBooks recognises the challenges that most small and growing businesses face – they have faced them too.
Many entrepreneurs, executives or managers are very good at what they were trained to do, but have very little idea about how the financial side of the business operates.
How many business owners and managers have you come across that can’t read a balance sheet? If you ask them why, they will always say that they rely on their CFO, FD, FM or accountant to tell them what’s happening to their business’s finances.
This lack of financial acumen has resulted in business owners being misled, which in turn has led to the demise of many businesses.
This is why QuickBooks not only developed accounting software that is quick to learn and easy to use (for operators as well as senior management), but it can also be accessed by different levels of a business, as the business grows.
Take for example QuickBooks’s latest innovation – the Business in a Bag concept – aimed at start up’s and fledgling businesses, this package includes software, a training manual, discounted training and mentoring (all at a very reasonable price) and has been devised to help new business owners to achieve their goals.
QuickBooks continues to focus on serving the needs of small and medium-sized businesses in South Africa.
There are no hidden surprises and of course, with QuickBooks’ legendary, easy-to-use interface that has made QuickBooks the choice of millions of users globally.
Their entrepreneurial spirit and understanding of the needs of their customers has certainly been a contributing factor in creating the massive support network that they offer to businesses, whether they are just starting out or managing exciting change and growth in their organisation.
Says Gary Epstein, MD of EasyBiz QuickBooks, “We are an entrepreneurial concern and know how difficult it is to start and manage a small business. On this journey, one thing is certain, without a good financial understanding and a feature-rich accounting package, most new ventures fail. We believes in assisting start-up and growing business and our goal is to help ensure that the entrepreneurial spirit of South Africa stays alive”.
How the Right Technology Makes DIY Payroll As Easy As 1-2-3
Madelein van der Watt, Development Manager at Sage Pastel Payroll & HR, offers a simple guide to easy DIY payroll with the right technology.
If you own a small business and employ people, making sure they’re paid accurately and on time each month is probably one of your biggest headaches.
After all, it’s not worth your while to pay a full-time resource to run a small payroll, while outsourced providers can be expensive and unreliable.
However, it’s simpler and less time-consuming than you might imagine to run your own payroll, provided you put the right tools in place.
Here are a few steps to follow to successfully process a SARS compliant payroll and pay your employees on time, and all in just a few hours a month.
1. Have the correct employee info
Ensure that you have up-to-date and accurate personal information for each employee, including:
- date of birth (age affects the tax calculation)
- banking details
- medical aid contributions and dependents (for tax credits).
Employee self-service solutions allow your employees to view and edit their personal information from a web browser or a mobile device. That means they can help you keep their records up to date, which can save you a great deal of time and inconvenience.
2. Get the basics done
Capture the basic data for each payslip that will remain constant each month, for example, monthly salaries, pension and medical aid deductions, and fixed allowances.
If you store this information in your payroll software or on a spreadsheet, you won’t need to recapture it each month.
3. Getting the variable payroll input
There are many fields on the average payslip that change all the time – overtime, bonuses, commissions, travel claims, and loan deductions or garnishee orders.
Some of this information might be on email, some jotted down on bits and pieces of paper, and some claims might still be outstanding. Use technology to bring order to the chaos.
Insist employees use employee self-service to submit their timesheets and claims for overtime and expenses, so that you will have access to the information in one place when you need it.
4. Calculating deductions
This is the most difficult, time-consuming and error-prone step in the whole process, particularly if you try do it yourself with a spreadsheet or a calculator and a piece of paper.
Rather invest in a reliable payroll solution. There are affordable options with flexible, per-payslip pricing.
The really good ones allow you to do your payroll at your convenience nearly anywhere you have access to the Internet. You can do your payroll from your tablet or smartphone while travelling as easily as you can from your computer at work.
Related: How to Survive The SARS Season
5. Producing a professional looking payslip – in paper or electronic version
Providing your employees with a proper payslip is a requirement of the Basic Conditions of Employment Act. If you make use of a software solution, you will be able to generate a well-designed payslip with all the information required by law simply by hitting the print or email button.
6. Reporting to SARS
Each month, you must report your Pay as You Earn, Unemployment Insurance Fund (UIF) and Skills Development Levy calculations to SARS, and of course, pay the money to the agency. You also need to send the UIF a list of your employees, how much they earn, and how much their UIF contributions are.
Payroll software will produce these reports in the correct electronic formats so you can email them or upload them to SARS’ e@syFile software.
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