How much do you pay yourself in salary as an owner of your company? Do you take a percentage of the revenues? Do you have a set salary with a raise every few years based on profits? Alternatively, even worse, do you share the business account with your personal account and just use the company credit card?
The best way to know how much you should pay yourself in salary is first to know your numbers. Have your accounting numbers available. Calculate your revenues, expenses, and profits per year and see how much the company can handle to pay you. Don’t forget to make sure that you are accounting for future expenses like mowers or trucks or other equipment you’ll need in the future when your current equipment breaks down. Also, be sure to realize how much money you need to pay your employees. Be sure you’ll have enough to get the work done and have money for their raises in the future.
Turf Magazine says that in 2014, the average owner income was $53,323 a year (see the full article here). Here are a few systems that company owners often use to figure out their salaries.
Paying Yourself Last:
Many entrepreneurs in the Green Industry start their companies without figuring out their salary – they just expect to live off of any extra money they have once the company’s bills are paid. This can result in a lot of confusion between what are the company’s assets and the owners assets.
It is a good idea to start with a small salary knowing that your company will grow and pay more in the future if you can invest larger sums of money now. Many business owners start with as little a salary as $24,000 a year. However, if you combine all your money in one banking account that can make it very difficult to track your business expenses versus personal expenses and can make it hard to grow as a company and possibly get you in trouble with the IRS! Always make sure that you run separate accounts for your business and personal expenses.
Paying Yourself A Percentage:
A mowing company in the South can plan on paying their owner 35% of revenue when they first start up. This is because they have little or no overhead costs and fewer issues with work slowing down each winter. When the company is working out of a garage, they have almost no overhead costs. Once the company grows to approximately $400,000 a year the overhead costs increase dramatically because of renting a shop, more equipment, more maintenance fees among others. You can try to pay yourself based on a percentage of your revenues but realize that the percentage needs to be re-evaluated as you grow in size. Also, be careful of how much you pay yourself in the off-season depending on where you live. The spring brings lots of business but also lots of costs for equipment, maintenance and more so don’t blow your money over the off-season.
Watch out for Irregularity:
According to Turf Magazine, the IRS never likes irregular salaries so if you find a way to make your income more established that can help you avoid red flags. One way to do that is to have your customers pay you a monthly fee all year to maintain their property. Another is to find work off-season to keep your company going which is useful for lots of reasons – like retaining employees and keeping up your profits. You can find more ideas for Winter Work here.
Budget, budget, budget!
The best way to pay yourself is weekly or bi-weekly. Try using a conservative amount that you KNOW YOUR BUDGET CAN HANDLE. Know your numbers, know your expenses, know your revenues, and know what costs are coming up that your company needs to save for. You can then take what’s left and determine what a fair, regular salary is once everything else is addressed. Know your profit and loss statements, track your man hour ratings, and understand gross profit margin.
Without knowing what your company can afford, you won’t know the true amount to pay yourself.