When we meet with start-up customers, one of the first things we start discussing is compensation. How does the owner of the new business begin to formulate a plan for paying herself? Everything is brand new, after all, and cash flow is far from steady. What do we do?
Put a cash flow forecast together:
• It’s important to start putting the thoughts and assumptions about cash flow in a spreadsheet so they can be examined for reasonableness and held up against the actual results when the business gets started. Only after you have an idea of cash flow can you build out a plan for compensation. Starting a new business without a cash flow forecast is ill-advised.
• Remember, paying back a loan that you made to the business is NOT compensation.
Don’t omit a plan to pay the owner:
• Most new owners say “Well, we don’t really have a lot going on, so I’m going to just omit my compensation for the time being.” Nope. Bad move. If you don’t build in a plan to compensate yourself now, you won’t have that goal to work towards. Let me make a bold statement: if the business can’t afford to pay the owners something, it has no business making plans to hire a FT employee. Would you work for someone else for free for an undetermined amount of time? I didn’t think so.
• Did you know it’s impossible to tell how healthy your business really is unless you’re paying yourself? That’s right. No one else would work for free, so you aren’t really looking at true numbers if your compensation isn’t built into the forecast. If you’re not paying yourself, and the business is barely breaking even, you are actually running a business that is losing money every single month.
Build the compensation plan that fits your entity:
• Little-known fact…if you’re the sole member of a single-member LLC, you can’t put yourself on salary. You are paid through Owner Draws, not salary.
• If you the shareholder of a corporation (S-Corp or C-Corp), then you have different rules that govern payroll and dividend distributions.
• Partnerships…don’t even get me started on explaining partner draws and guaranteed payments.
Compensation plans aren’t just for large corporations. When we consult with small business start-ups, we emphasize the need to build owner compensation into the initial cash flow forecast. We don’t get a lot of push-back, mind you; most new business owners just don’t understand how to go about compensating themselves. If you have a new small business and need assistance with building a cash flow forecast and building a compensation plan, our Start-Up Consulting solution may be just what you need to chart a new course for your venture.