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Every small business owner and entrepreneur assumes their venture will succeed. This is a healthy, and necessary, attitude to mimic for those of you contemplating starting a new business. But the fact is most successful entrepreneurs have failed twice previously. The successful entrepreneur views these failures as learning experiences and an opportunity to succeed next time. But will there be a next time for you? Consider this true story; Like so many entrepreneurs, Richard’s first business started with a single customer. He had a regular job but had been contacted by a company that wanted to purchase a few hours of his time to assist in solving a problem for which he had expertise. Richard took on the work. One "little" job lead to another and soon Richard was spending a significant portion of his spare time working as a consultant. The extra money was great. Eventually it became possible to quit his job and start his own company. Initially all his work came from the company that had originally hired him. Richard’s business grew to accommodate increasing demands from his single customer. This growth was made possible by returning all profit back into his new company - Richard only kept the bare minimum needed to meet his current expenses. Unfortunately, after a couple of very successful years, Richard lost this major and first customer. The loss was devastating and eventually the company was forced into bankruptcy. Richard lost his company and had very little to show for his previous hard work! I guess we could say Richard was a victim of his own success. Unfortunately, because of the very traits that can make an entrepreneur successful, he or she will sometimes forget to plan for possible failure. One of the biggest and potentially most damaging errors is failing to pay yourself. Many small business owners figure that later, when the business is making a profit, they can take a salary. This can be a grave mistake in the event of a business failure — you may just end up with nothing for your efforts and, worse, be left in a position where it is not possible to try again! It is difficult to find a book in the small business genre that even mentions paying yourself, let along give some advice about it. Could it be that all those authors assume it’s not worth mentioning since a business owner does not need to be told to pay himself? As our little story above shows, it does happen—and frequently. Don’t you do it! Do NOT make the mistake of putting every dollar of profit back into your business. You may prosper for a number of years and then be suddenly plunged into bankruptcy through no fault of your own. If this happens, and you have not planned for the eventuality, you may find yourself in a very difficult financial position. Remember that you deserve to be appropriately paid for your efforts. Pay yourself first. Most small businesses are not initially profitable and this must be taken into account in your planning activities. If your business will be financed by others, ensure that you have added an appropriate salary for yourself in the business plan. If you are financing the business yourself, the situation is a little different. You probably have assumed you will take no salary until the business is profitable. But when profit is available, it’s important to immediately start paying yourself on a regular basis - just as if you were an employee. How much should you pay yourself? There is no easy answer or magic formula and it is difficult to give specific advice but some general guidelines are worth noting. If your business is equity financed, your salary should be formally determined based on a formula agreed to by the equity lenders. As an example, in a recent startup for which I assisted, the equity investment was $200,000. The two owners agreed to a starting salary of $3000/month until the business became profitable at which time their salaries increased based on a percentage of gross profits. The initial salary was based on the current monthly needs of the two partners and was agreed to by the equity investors. If your business is debt financed (by yourself or others), your business or strategic plan should include your own salary and its basis. Clearly, if you are using your own money to finance a new business you probably won’t initially take a salary. In this case you should ensure that your savings and any other sources of income will support you until you become profitable. However, as soon as the business starts returning a profit, start paying yourself a reasonable salary. Strike a balance between growth considerations and your salary. This will be different for each business but thoughtful planning will allow you to determine an effective split. We all plan for success but in the world of small business, failure is all too possible, and for reasons beyond your control. So plan for both success and failuredon’t return every dollar to the business keep some for #1, yourself! Robert Sullivan is the author of "The Small Business Start-Up Guide" and "United States Government - New Customer!" either of which may be ordered toll-free at 1 800 375-8439. Visit the award-winning Small Business Advisor at http://www.isquare.comE-mail to bobs@isquare.com for a free subscription to his newsletter - use "subscribe" as the subject Click On The Banner To Visit Our Website
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