Owner Salary
The concept of owner salary is very crucial.
However, owner salary for small businesses is covered barely or not at all in business books or even in industry-related trade shows. Moreover, many entrepreneurs interpret it in the wrong way. The majority of business owners mistakenly think their personal salary is the same as their business’s profits. They confuse their salary with the profits their business generates.
Salary is compensation for the owner’s labor, and ownership generates returns. In other words, owners get paid a salary for their work (what they do), and they get a return on what they own.
The net income would not be accurate, if the owner is not getting a market-based wage.
My conversations with business owners reveal how proud they are about the revenue and net income they generate. When the conversations go deeper, I find out those owners don’t pay themselves market-based wages for their efforts. If a business owner isn’t paying himself/herself a market-based wage, when they hire a replacement for the role they were covering, they will have to pay market-based wage. Consequently, that will negatively impact the business’s net income. If they hire an employee at a below-market rate, that may lead to a high turnover rate, lower productivity, reduced quality, and lower customer satisfaction. These are all extra costs to the business and they are expensive.
To sum up, business owners should definitely pay themselves market-based wages and include them in their financial statements. This provides the business with more accurate financial information; when the business grows, the owner can easily step out of this role by paying someone else market-based wage and focusing on other aspects of the business.