Thursday, November 11, 2010

Why entrepreneurs should take a salary

Alexandra Lopez-Pacheco, Financial Post · Sunday, Nov. 7, 2010

Experts say entrepreneurs with new ventures are often hesitant to pay themselves, believing it isn’t in the best interest of their company.

“There are a couple of reasons entrepreneurs need to think about at least registering a salary for themselves on their month-to-month expenses,” says Michael Mauws, Professor, Business Policy & Strategy at Athabasca University Faculty of Business. “Some entrepreneurs, particularly in the early days of a startup, don’t want to take a salary because they’re worried how their employees are going to perceive it. They want to send the signal they’re sacrificing for their company so everyone else should as well. In the long run, it’s not a way to get good people in your organization. They’re likely to think that if you can’t afford to pay yourself, how stable is their pay cheque?”

However, it is in the best interest of the company that an entrepreneur pay themselves a salary — even if they’re sinking every penny of that salary back into the business, Prof. Mauws says. “One reason is that you’re trying to assess the profitability of the venture and if you go to sell it, people want a realistic idea of its expenses and revenues. If you are an owner-operator, actively involved in the business, then your salary is a legitimate cost that needs to show up in the financial statements. Or if at some point you want to put someone else in the management suite but not sell the company, you want a realistic idea if there’s going to be any money left over at the end of the day. If you’re living off fictitious profits because you’re not claiming a salary, you’re going to have a rude awakening when you try putting someone in that role.”

Claiming a reasonable salary that is reflective of the cost of having the managerial talent you represent for your company simply makes a lot of sense. “What you don’t want to do is in your salary also be taking out any of your rewards for ownership — the equivalent of dividends. It should reflect the cost of replacing the entrepreneur in the management capacity,” says Prof. Mauws.

The reality, however, is that many startups are starving for cash and the entrepreneur is willing to make deep financial sacrifices to get his or her venture off the ground. In some cases, these sacrifices are not a choice but a necessity. “This is particularly so if they haven’t yet received angel financing or venture capital into the company and they’re in the early boot-strapping days when they’re begging friends and family for money. They feel guilty if they’re taking money out of the business,” Prof. Mauws says. “They can still claim their salary but each month, they can make a shareholder’s loan to the company or purchase more shares, and put as much cash back in as they need. It is a legitimate concern not to want to starve the business for cash by paying yourself a salary in the short run when you expect a positive cash flow down the road. So I wouldn’t want to say every entrepreneur should literally pay themselves a salary but I do think it is useful for entrepreneurs to reflect a salary in their financial statements and talk to their accountant about the best way to get that money back into the company if that’s what’s needed.”

1 comment:

Alex moner said...

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