SALARY, ROI OR BOTH?

To get a little perspective, let’s take a step back to before you had a business, when you worked as a salaried employee — you provided your employer with skills and expertise for which you were remunerated in accordance with the value of the service you provided. During this time you may also have invested a portion of your earnings in the bank on which you expected to earn a return.

The same principle applies, or should apply, in your own business. For the time and energy you dedicate to managing and running the business, you should be remunerated with a market-related salary. In the beginning, most business owners are reduced to working like slaves, doing literally everything there is to do and working longer hours than ever before. Sadly, statistics from the USA reveal that 74 percent of small business owners earn less in their own business than they could working for someone else. Whether the money paid to you is an actual salary or drawings, your accountant or tax advisor will be better able to advise you on the appropriate structure, depending on the circumstances.

No matter how passionate you are about your business or how much you enjoy the freedom and flexibility of being your own boss, you cannot work for free. Paying yourself a market-related salary needs to happen as soon as humanly possible and should be budgeted for as a regular business expense.

Whilst being a business owner has many advantages, it also comes with added pressure and a very different kind of stress. Owning a business is supposed to be a vehicle that supports you and serves your dreams and aspirations for your life. It is therefore critical to ensure that you are valued for your inputs and that there is a feeling of mutual value exchanged. Managing the business should justify a commensurate value exchange back to you.

Like it or not, as humans we are wired around the WIIFM principle — What’s In It For Me. If you don’t feel like you’re getting enough in return, you will become resentful. The building resentment is slow at first and often largely sub-conscious, but it happens. If you’re feeling burnt out and fed-up with your business, first double check the level of your salary; if it’s not what you’re worth it could be a major contributing factor to your current state of mind.

When you invest your hard-earned savings with the bank, you expect to earn a return on your investment. In fact, with the advent of online or app-based banking you’re probably checking your monthly interest, albeit small, a couple of times a month. Similarly, when you invest in your business you should expect to earn a return on that investment.

So why are you ‘giving’ money to your business and expecting nothing in return? I often hear things like, “Does it really matter? It’s my business anyway,” or “It’s all my money, isn’t it?” The reality is that as a business owner working in your business, you have two functions — that of employee on the one hand, and shareholder on the other. The former should provide a salary and the latter a return on investment in the form of profits and/or dividends.

If you don’t benefit from both a salary and a return on investment you may as well sell the business, invest the proceeds and earn a return for doing absolutely nothing while earning a market-related salary working for someone else, sans the stresses that comes with having to manage a business.

While we acknowledge that there are typically a number of factors at play and there are realities around tax, the type of business, the economy, the state of the job market and so forth, it’s the principle that’s key. Earning both a salary and a return on investment is a must, especially if you are a business owner still working in your business.

If you don’t budget for both, you invariably just get one. We all need money to live and as most of our expenses are incurred monthly, drawing money from the business also happens on this basis. The return on investment on the other hand is not deemed urgent, isn’t paid monthly and as it doesn’t really affect your personal survival, it is easily neglected — fix this now!