If you are thinking about starting your own small business or improving your standing in your current small business, you might be thinking about how much small business owners should make. Indeed, thinking about what small business owners should make can be a great way to gauge a small business’s performance against its peers. You can also use this information to explore ways to increase your income as an entrepreneur.
As you start to explore the amount of money that small business owners make, you will naturally want to distinguish your small business or startup and its unique characteristics that will determine the money which you ultimately take home. You may also have an amount of money you want to reasonably make in an annual salary. You should keep this in mind when considering how business owners set their salaries relative to their expenses. Finally, as with all small business owners, you are likely interested in the tools that you can use to increase the profit and salary that you get as a small business owner.
In this post, we will go over the factors determining a small business owner’s average income, how small business owners decide on their salary, the average small business owner’s salary, and strategies you can use to increase your small business owner income. We’ll cover the following topics in this article:
This article details:
What Factors Determine a Small Business Owner’s Salary?
It is important to remember that analyzing what an average small business owner makes from the operation of their business involves assessing averages. These averages reflect a balance of the varying situations that different small business owners are involved in. A salary range can be reflective of old and new businesses. Yet, many other factors affect the earnings of a small business owner. Some of these include the size of a business, the performance of a business, and the debt and equity obligations that a small business has. Understanding each of these factors in the context of your small business can help you assess what your own business or potential small business should generate in income for you.
Size of the Business
One of the largest factors involving the income a small business owner receives is the size of the business. There is a saying that goes: you have to spend more money to make more money. In this context, the size of your business is highly relevant to determining your income. For example, if you are doing self-employed consulting, have a small coffee shop business, or a small accounting firm, you might expect to take in less at the end of the day than a small business construction firm or a small business hotel.
Of course, with every business, margin matters. However, the larger your business is in terms of the customers it can serve and the capacity it has to produce more goods and services will increase the likelihood of larger profit at the end of the day. If you, as a small business owner, also work in the business, having to manage a lot more as part of your business likely increases the salary of your managerial position.
This logic applies a lot when thinking about how your business might be able to generate a higher salary for you as a small business owner who works in your business as well as improve the sheer volume of profit that your small business is generating. If you can have a bigger business, your income as a small business owner should logically improve. We will dive into the ways that your small business can expand its cash flow soon.
Performance of the Business
The performance of a small business is key to determining the amount of income that a small business owner can take home at the end of the day. Well-run businesses produce more profit than poorly-run businesses. This is shown in the margins of a business.
Any business that sells goods or services takes in revenue. There are various costs that detract from revenue before a business reaches the amount of net income that they have received from its operations. These include the costs of goods sold and operating expenses like sales, general, & administrative, which encompasses a lot of different job titles within a company. When a business is run well and efficiently, the cost of goods sold and operating expenses are low. This means that a business can keep more of the revenue that it generated earlier in the day. As a consequence, a successful business has more money to pay out in salary to its business owner or give out to shareholders as profit.
The more efficient and effective a business operates, the better. If you know that a small business reaches its target market well and executes well on its operations, you might assume that the small business owner takes in more money as a result. If a small business is doing worse in terms of its performance, you might expect that a small business owner is taking in less money in terms of salary and profit.
At the end of the day, it is important that you can relate your small business’s type of business or your small business idea to the key drivers of how much a small business owner makes. You should consider the efficiency of your operations, your supply chain, your employees, your processes, your accounts receivable, and other aspects of your business that affect your margins. If you can improve your margins, you can improve the personal income and total compensation that you take home as a small business owner and be more profitable with the capital that you have from your hard work.
Debt and Equity Obligations
One of the last main categories of factors affecting how much a small business owner makes is the obligation of the business toward the debt that it has taken on with lenders and the shareholders that it serves. There are a variety of possible debt and equity obligations that affect the total amount that a small business owner can take for themselves out of the business.
Debt is an obvious contributor to the amount of money that a business has left over. A business might have funded a recent expansion, upgrade, renovation, or another type of activity requiring them to buy capital. As a consequence of borrowing this capital, the business must pay back the loan in different payments. Since the business now has to appropriate money to its debt obligations, the business has less money left over for profit or an increased owner salary in the short to medium term.
Equity obligations might also exist with the amount that small business owners may need to distribute to shareholders. If you have additional shareholders in your business that are not just you, or you have a certain amount of equity structured to give certain shareholders dividends, then you may have to worry about paying out a given amount or proportion before you could increase the amount of salary or profit you take home as a small business owner.
Each small business will have a unique debt and equity situation that contributes to the amount of capital that they have left in the bank to pay to a small business owner as a salary or as profit. As you go forward, you should consider your own situation to determine how you might be able to improve the amount of money that you can take home.
How do Small Business Owners Set Their Salary?
As small business owners are in charge of their small businesses, they set the amount of money that they pay themselves. While choosing your own salary might sound like an easy task in personal finance, there are a lot of things to consider that can substantially complicate this process. This is especially true because a business is usually obligated to several expenses that a small business owner needs to worry about before being able to pay themselves. A simple hourly wage, median salary national average, or monthly pay guideline will not easily work in every scenario. There is much to consider.
One of the first things that small business owners consider when setting their salary is the amount of living expenses that they have. This might include things like food, gas, insurance, car and home loan payments, and general amounts of money to save for the future. Choosing an amount that can fit all of these expenses can help a small business owner set a floor in terms of the salary that they require. Before a small business owner increases their salary, they might want to have a good idea of how much they need so that they can be sure that all of their other obligations are taken care of and paid for.
Determining Future Expenditures
Another thing that business owners consider when setting their salary is the small business’s projected expenditures. These expenditures include things like future inventory orders, wages and salaries owed to employees, insurance payments, loan payments, taxes, and any other expense that your small business might need to pay in the short term. The money which is left over can be appropriated to a small business owner salary increase or a profit.
Determining these future expenditures often involves looking at historical statements or projections that show the average expenditures of a business in a given period. This historical context can help make the process of determining future expenditures smoother and give business owners a sense of how much money will be left over for them.
Taking Home a Profit
Another consideration of small business owners when setting their salary is to decide how much money they want to pay as income to themselves as an official employee of the business and how much a small business owner wants to take home as profit. The exact best split of these things depends on many factors, including the legal structure of your business and careful consideration of the different types of taxes that you might be subject to with the IRS. As a small business owner, you should consult the laws governing your business structure and the amount that you are intending on paying yourself. You can then get a better understanding of whether it is worth it to increase your salary as a business owner or take home more profit instead of official business salary income.
Average Salary of a Small Business Owner
In the grand question of how much do small business owners make, there is one general answer. A popular estimate places the average salary of a small business owner at approximately $70,000. This estimate may place a salary in the context of average paid salaries, but it may not provide you with a full look at the money that you could be earning. For one, this estimate may not include the average profit that business owners take out of the business after their salary is paid.
This could be done for tax reasons depending on the structure of your business. Doing so can help improve the amount of real post-tax income that you have. As always, you should place the salary that you intend to pay or pay yourself in the context of your business’s unique situation.
Increasing Your Small Business Owner Income Through Debt
In any case, your ultimate goal as a small business owner is to make money. There is no limit to the salary or income that you need to have for your small business. Your income from your small business should be more than enough to just cover the cost of living. You should strive for a comfortable income that benefits you and your family.
Debt as a Strategy to Increase Your Income
One of the ways that is fundamental to increasing the income earning capacity of your small business is to expand its operations. This might mean funding a second location to your existing business, building another part to your current facility, or making an investment in more efficient equipment. In any case, growing your business can grow the income that you receive from your business activities.
One of the ways to do so now is through the use of debt. Debt, when used correctly, can be a powerful and sensible option for your small business to grow quickly. Debt can allow your small business to achieve new heights and acquire many more customers. There are several options available to you as a small business owner to explore.
While some small business owners seek SBA loans from the U.S. Small Business Administration, many turn to term loans to help facilitate short-term investments in their small businesses. Term loans can be used for renovations, new facility purchases, acquisition of inventory, or buying new equipment.
Term loans are available from banks, but they usually come with lengthy application processes and stringent due diligence requirements. Term loans are also available from online alternative lenders (like Biz2Credit!) at slightly higher interest rates but much easier application and approval processes.
Term loans can help accelerate your small business’s potential to provide you with additional income by providing you with a resource to deploy capital in a way that can help you generate more income.
Lines of Credit
As mentioned earlier in this post, cash flow and the efficiency of a business’s operations are important in determining the amount of money that a small business owner takes home at the end of the day. Maintaining an efficient use of capital may involve keeping a relatively lower cash balance on hand. This can help you, as a small business owner, take home more money at the end of the day.
In order to not worry about keeping a lot of cash in your small business at one time, you can use a line of credit. A line of credit is a type of loan similar to a credit card. A bank or alternative lender can issue your small business a line of credit with a maximum borrowing limit and an interest rate. As your business grows and runs into unexpected expenses, you can draw down on your line of credit without having to interrupt a slightly higher salary you would like to have. This is because you can keep less cash in the business to deal with unexpected expenses.
As you draw down on the line of credit, you can pay the line of credit back as your business takes in more money. The interest rate will likely be a variable interest rate, and most lines of credit are revolving, which means that once you pay a certain amount of the borrowed money back, you can reborrow from that money.
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