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.”
How To Strategically Minimise Accounting Costs As A Start-up
“Financial Compliance can be a costly exercise when approached carelessly”.
As a practicing accountant one of the most common phrases uttered by clients is that “I will get to my accountant when I can afford one”. The reality is your accountant costs can be minimised when you applying some simple tricks to avoid being charged an arm and a leg.
I have compiled a few areas where you can streamline your business to minimise your businesses accounting fees. Please bear in mind these are guidelines and a consultation with your accountant will still serve you best.
1. The ‘Shoe Box’ strategy is dead and gone
The shoe box is a box filled with all your company and supplier invoices jumbled into one box. As an accountant when faced with the shoe box we smile because now we get to charge our hourly rate doing admin that could have been done by either you the business owner or one of your employees. Accountants make a large portion of their turnover from doing admin that could have been avoided if business owners had more foresight.
2. Separate personal from business transactions
Nothing is more time consuming for an accountant then having to comb through a business income and expenses only to realise through consultation with the client that personal items were accounted for as business income or expenditure. As a rule of thumb remove all personal income and expenditure from your business in totality.
3. Record keeping! Record keeping! Record keeping!
Simple record keeping can be your best friend in reducing costs. Here are a few guidelines to live by:
- As pointed out in Number 3 have a separate bank account for business and another for personal
- Date and Number your invoices, sounds simple but very few start-ups put emphasis on this administrative function.
- Provide complete statements for the period requested by your accountant for your credit card and bank statements.
- Keep supplier statements as this will aid your accountant especially during the financial year end of your business.
- When submitting your debit/ card receipts and there is no accompanying invoice list on those receipts what was purchased.
4. Ask your accountant for a Retainer Agreement
A retainer agreement is a great way to ensure your monthly accounting costs do not fluctuate. With a traditional agreement your fees may spike when it is your company’s financial year end or when your taxes are due. With a retainer agreement your able to budget for a set figure payable monthly. This also translates to an attractive for your accountant who can now rely on a guaranteed cash flow injection monthly.
The bases for an accountants pricing will involve what their hourly rate is , the longer they spend on doing record keeping and deciphering what activities took place in your business the more you will be charged. Remember regardless of how close you are with your accountant or how simple you feel your business structure is your accountant will need as much information as possible to represent your business activities accurately on your financial records.
Technology In Accounting – Race For Relevance
Change is not just coming, it’s already here and the rate of change is growing exponentially.
Change is not just coming, it’s already here and the rate of change is growing exponentially. The recent research from ACCA around the race for relevance talks of six key technologies (Analytics, Artificial intelligence, Cloud computing, Cyber, Social and Robotic process automation), likely to present opportunities that challenge our traditional ways of working to all businesses, including SMEs – as well as their finance function.
The report explains that whatever the size of the business, technology change is having an impact.
It is imperative for SMEs to understand these technologies and start to, at least, plan. Failure to capture opportunities runs the risk of businesses being marginalised.
Technological advances provide finance functions with significant opportunities to play a valued role in maximising the organisation’s strategic ambitions and in how it is evolving. Not of all the key technologies may be relevant to all immediately, however, understanding which of them apply and can deliver value, is important.
In this corporate race for future relevance, recognising the opportunity is essential. Organisations are in a race to remain relevant to their customers and communities. Adapting and embracing technological changes in business is critical. Companies who leverage new technology well are going to win big in business. If CFO’s are to remain in decision making roles the need to understand the importance of data analytics is crucial. Businesses need forward thinking CFO’s who:
- understand how to use the information available to them to provide strategic insight in real time;
- capture, measure, report and predict future performance in a much more agile manner to support better and quicker decision making;
- ensure they have in place effective and efficient processes that satisfy the overall business requirements of finance.
This is not to say that there is one approach. No single model fits all finance teams but there is an overall direction of travel. However, its not enough to become more efficient, but finance function must assist businesses to make decisions based on the right data. To achieve the goal of transforming the finance function, the CFO needs an understanding of the emerging technologies and the opportunities available. The CFO must ensure that there is sufficient governance of the data sources, be these internal or externally generated, to provide insights based upon ‘one version of the truth’.
In realising the finance technology strategy, it should be remembered that this is often a partnership between the Information Technology (IT) team and the finance function. As business partnering has affected the relationship between finance and its customers so the same process can be replicated in the relationship between finance and IT.
By 2020, organisations are expected to gain $1.2 trillion in business from their slower-to-adapt peers. How do you, as the accounting professional, influence this today? How do you work with IT to thrive in this age of change?
Can Computers Replace Human Accountants? We Doubt They Can
People remain paramount to the accountancy profession despite advanced modern technology and artificial intelligence. But accountancy is no longer just about financial statements and tax returns.
“The secret lies in embracing the technological advances without sacrificing the values and ethics that sustains and defines the profession,” says Jeanne Viljoen, Project Director: Practices at the South African Institute of Chartered Accountants (SAICA).
“Don’t fear technology – embrace it and use it wisely. By embracing technology, the profession can provide deeper insight to their clients while helping them understand the rapidly approaching ‘new normal’ for business operations.”
The radical transformation of accounting
“It is no secret that accounting has been radically transformed by globalisation, digitisation and a growing amount of technological integration into business operations.
External disruptors, like the use of big data, the cloud and distributed ledger technology also affects the profession, but computers will never replace human interaction or advice.
Computers and algorithms may increase accuracy and can crunch numbers and vast amounts of information at increasing speed, but they have no feelings and cannot learn common sense or the ability to plan creatively. They also cannot deploy human judgement or professional scepticism,” Viljoen continues.
This, paired with a human accountant’s technical knowledge and adherence to a global Code of Ethics and international standards applicable to certain types of engagement, offers vast new potential for accountants to accurately interpret data and develop insights that will underpin more valuable strategic recommendations for their clients.
The focus of accounting is changing
“While traditional services will continue to remain an important part of what accountants do, the focus will be different. The biggest benefit of using artificial intelligence (AI) instead of manual bookkeeping, is probably the time it frees up for accountants to provide strategic advice to businesses and organisations.
Real-time accounting can help small to medium businesses to take decisions when needed instead of waiting for months for financial statements.”
Correct analysis of business data is exactly what gives a business a competitive edge and help generate a higher profit margin.
“If, for instance, your company sell products online, software that enables you to determine when your customers are most active online will help you determine the best time to market to them. The correct technological systems and software can make your business lean and mean and will enable a total overview of your business at the press of a button.”
This can prevent relatively small problems like absenteeism on certain days and over claiming on business trips to turn into big crisis situations.
“This is exactly where accountants will continue to play an important advisory role, because they are trained to analyse risks, and spot outliers, exceptions and trends.”
Accountants can also assist businesses and organisations with cyber security and successfully navigating their digital landscape, helping to avoid cyber fraud and the theft of personal information.
The future of accounting
Viljoen also referred to twelve predictions about the future of the accountancy profession made by Rob Nixon, an internationally renowned accountancy expert. These are:
- Compliance will be completely commoditised, meaning less “human” time spent on ensuring compliance.
- Cloud accounting will be installed in more than 90% of small- and medium-sized entities, because more and more people want their data and information on their mobile devices.
- More than 90% of accounting firms will have cloud practice management, as it improves efficiency and mobility and lowers operating costs.
- Coaches and consultants – even non-financial – will become competition for tomorrow’s accountant.
- Clients will be more transient because of cloud accounting. All that is required for data to be captured is a login code. This will result in tighter and more enduring relationships between client and accountant.
- Offshore teams will be more prevalent – cloud computing will enable your teams to work anywhere.
- Compliance prices will plummet, new systems costs will be reduced and financial reporting will be current.
- Marketing and sales skills will be needed – with commoditised services comes price pressure and new low-cost entrants into your market. Accountants will need to differentiate and give compelling reasons as to why clients should stay with them.
- Young people will not buy into staid and boring systems – they are not interested in old-fashioned systems/equipment and offices. Instead, they will be tech-savvy and will want progress faster than ever before.
- There will be no more time-based billing, but rather a valuation of the intellect that has taken many years to develop.
- The role of business advisor will result in more than 80% of an accountant’s revenue, as accountants can add a huge amount of value when they know the facts. Spending less time on compliance services will mean that an accountant will have more time to truly live up to the trusted advisor status that they deserve.
- Advanced technology will mean that clients are finally served properly with real-time data, resulting in the accountant adding real value to the business.
In the light of all of this, it is important for small to medium businesses to look critically at their digital strategy, she concludes. “You don’t need to buy the biggest, most expensive accountancy system. Look at your cash flow and needs and invest in a system that can grow with your business. Your accountant will be the best person to advise you on this.”
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