Setting your salary for your business

What is the best way to go about setting your salary for your small business?  

I've seen some suggestions to create a set weekly/biweekly amount.  That works great unless your business is seasonal or the revenue varies from month to month.  Others, like in profit first, say to set a percentage and pay yourself that on a regular basis.

What are the pros and cons to both ways that you all see?  What has worked best for your?

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  • Well, I'm a believer in the monthly budget, this month's money goes to next month's bills. So I am handling self-employment the same way - I fund the "Income for next month" category to what I consider my monthly take home. When I get paid, first I set aside 20% for taxes, then I have a few other business related categories and cover any business expenses, and anything left over gets dumped into "income for next month." Then when I get to the next month, anything above my monthly goal gets put into "Income replacement fund" and my goal for that is currently 6 months. This is to cover short months - for example right now August is looking a little tight unless I get some projects in so I may have to dip into that.

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  • I tried PF but always end up going back to profit last. I take care of immediate obligations first, things necessary to keep the business going. Payroll, rent, utilities, etc. As we gain income through the month i allocate it to the categories based on importance. Then reserves, including getting a month ahead, reserve payroll, long term expenses. Finally, salary. I make sure percentages of overhead are appropriate so that profit is consistent as possible, and I have monthly buffers that keep it extremely consistent. 

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 1 mth ago
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      Sky Blue Tugboat Profit First only works if theirs a profit. Otherwise you end up bleeding the business, particularly in the start-up phase when it's already bleeding. I'm glad that my times of self employment lately have been contract work. It makes it easier to know what to expect.

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    • nolesrule That certainly makes sense. We’ve had a profit for years, but I can’t seem to get a feel for the PF philosophy. Old dog, I suppose. We also have to pay contractors throughout the month based on their collections, and those are unpredictable. That for me threw a bit of a wrench in the methodology, though I’m sure if I were to stick with it for awhile I could make sense of it. What I do seems to work for now. If we grow much more I may give it another go. 

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  • Thank you for the responses.  I should probably explain a bit more how I am doing things right now.  

    I picked a set amount to be my husband's "Salary" each week.  Each pay period, I take what ever has come in over the last 2 weeks and divide it in to the following categories, based on percentages recommended in PF:

    1. Taxes (16%)-paid out quarterly
    2. Profit (5%)- paid out quarterly
    3. Salary (50%) 
    4. Operating Expenses (29%)

    We are lucky because our operating expenses are very low because of the type of work he does. 

    My dilemma comes when I go to pay him.  Most bi-weekly pay periods, the amount I have set in to that category exceeds the amount we draw as his "salary", so I am starting to build up a somewhat sizable buffer there.  I'm also about two months ahead with operating expenses.   My question is whether I should continue with the small, regular salary payments or actually withdraw the entire amount I've set aside biweekly.  

    Does it make sense to keep the smaller payments and let the buffer continue to build?  At what point would you take that money out since it's really what he has earned?

     

    Does that make sense to anyone?

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    • Persephone's Mom Hmm - so it sounds like you've set two different salary targets: half of all inflows go into the Salary category in your business budget, and then there is a specific amount you transfer on pay day (which, at this point, is less than what's in that Salary category). In other words, your budgeting 50% of inflows to Salary, but you aren't paying out 50% of inflows. Do I have that right?

      I see a few options:

      • Leave the buffer for slow periods, when your inflows won't refill the category.
      • Building a buffer that you might use to scale your business/hire someone new
      • Increase the amount you transfer on payday ( to reflect the 50% of inflows)
      • Adjust your budget to send more to profit 
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    • Marisa That’s exactly what I’m doing. 

      im going back and forth on whether it’s best to have a regular, smaller amount vs paying my husband the potentially larger irregular amounts. 

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    • Persephone's Mom I don't make a significant amount of money in my business (a livable wage, but not a business profit), but I don't give myself a set salary. I put everything I make into an "editing income for next month" category (separate from my husband's steady job) until end of month. Then I put 15% away for taxes, 6% for retirement, 10% for giving/generosity, and 5% for my fun money. The rest (and I guess technically the last 5-15% too) is my "salary." Except part of it goes toward funding my business expenses, I guess. That's about $100/month.

      I do sometimes drip my pay, so what YNAB says I earn in a month vs what my spreadsheet says I earned in a month don't always match. If I reach a point where I know the month is covered and the next month will be tight, I'll only transfer in part of my PayPal balance. And if I've earned a significant amount more than usual and I know next month will be fine, I'll work on funding my income replacement category.

      You seem to be in a place though where he could be due for a raise, if it's consistently over the 50% mark. If you're both happy at that salary, though, others' suggestions about looking to grow the business or keep the money there as a buffer are great ideas.

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  • I have a pretty good handle on what I need in my personal budget plus adding to long term and emergency, etc. so that is my starting point. But when my income was less certain (looking at you 2020!) and I couldn't meet that I would do 20% until I get to my base. Taxes come into play but I would rather take a hit when I do my taxes instead of dipping into savings... within reason.

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  • Persephone's Mom I thought of your question when I listened to Beginning Balance the other day! I think it was this episode, but I think you'll like the whole series.

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    • Marisa Thank you. I will take a listen to it. 

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    • Marisa I love Beginning Balance. 

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    • Marisa That episode was fantastic.  It definitely hit the nail on the head when talking about the personality types.

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