How to Budget Salaries for a Small Business
Starting a business brings excitement and wonder. Okay, you also won’t sleep much, you drink an inordinate amount of coffee, your groceries come via delivery, and your friends and family may report you as missing or dead, much like the “Paul is dead.” fiasco of the 1960s. (He’s still alive and making music if you didn’t know.)
When you first begin, you probably have just one employee – yourself. That makes your salaries simple. You pay yourself. That might sound like a scary thought. You decide your own income.
You’ve got more than one way to calculate your own salary. You can:
Go with what you’ve got, which means you pay yourself your current salary,
Choose your goal salary,
Calculate the minimum salary by dividing your total annual personal expenses (TAPE) by 12.
How To Budget Salaries?
You must set a goal and determine a hard figure because this becomes your first budget line in salaries. Consider it a training ground for when you grow your business and begin hiring others and must budget salaries for each employee, too.
Go With What You’ve Got
You choose the salary you currently make at your 8 to 5 job. Let’s say you make $35,000 per year. You already know that that amount pays all of your bills. You presumably already sock away a portion of it into savings and investment. Ah. You know it covers everything. That means you need to make 2,916.66 per month.
Suck it up. You will be fine. That sounds like a lot of money when you pay yourself. Try not to think of it in such huge portions. Divide it again. Divide and conquer – not people, but fear. Divide the monthly salary by five weeks and you come up with $583.33 per week. If that still sounds horrid, divide it again, this time by seven, six, or five.
Let’s use seven because, realistically, unless you already eat, live, sleep, and breathe your career, you should not start your own business. That’s because you must give your everything to the business. About 90 percent of businesses fail and one of the leading reasons is the owner wasn’t ALL IN. That’s a football term that means totally, completely, and utterly damned dedicated to development and winning. It relates to the Clemson University Tigers. (My older sister went to that university but graduated from UNC Charlotte. We love football.)
You go into the business like Clemson goes onto the football field – ALL IN.
When you divide it by seven you find out that you need to make the very manageable amount of $83.33 per day. You then divide it by eight hours to get your hourly wage. You need to make $10.41 per hour.
So, knowing that the calculation would be thrown off a little due to the pay periods and how even the days in months are, why did we go through that rigamarole?
If you are reading this, you likely either have always worked for someone else or you haven’t worked and want to start a business. Either way, you do not have much budgeting experience. The example shows you what you need to do to calculate for budgeting. Your budget has to show your annual and monthly expenses. Now that you want to run your own company, you have to learn to make and stick to a budget. You cannot constantly take out loans or you will end up in the 90 percent of failed businesses.
So, we’re not throwing the budgeting process into salary calculations. The two concepts are intrinsically tied to one another.
You cannot hire people without having a budget that you stick to and having the salary money already there to pay them for at least the first three to six months.
That is good business sense. (For the record, I started both of my businesses in 2005 and both are still open, running, and – knock on wood – thriving.) You must budget salaries as a priority, just like budgeting the electricity for a store front or Internet for a home business.
Choose Your Goal Salary
Don’t worry. I won’t make you do all the math again. You use the same calculations as above for this method. What changes is that you may not have an existing salary. Maybe you are starting from scratch. You could look up what the average starting salary for the position your service fulfills is. This works for retail, too. Look up retail small business owner. Let’s say though that you want to start a business making web pages for people.
Visit the Occupational Employment and Wage Statistics page at the US Bureau of Labor Statistics.
Everything is organized by category. Your job appears in the category of “15-0000 Computer and Mathematical Occupations.” Click that link to jump to the section which lists all types of jobs in that category. Whether you do back-end, front-end, or full-stack development, your job falls under 15-1250.
15-1250 Software and Web Developers, Programmers, and Testers make an average annual salary of $113,720, which translates to between $49.49 to $54.68 per hour. Now you know, and you can budget accordingly.
You might have thought you wanted to start out making $40K a year. That’s on point for a starting salary. The BLS lists the average or median salaries.
Now, you have just learned how to do the same thing when you grow your business. When you get ready to hire your first employee, you first go to the BLS page and look up how much you would pay the person:
This ensures you do not offer a salary that either over or underpays a person. So, perhaps you decide in year three of your business to hire an administrative assistant. From the same main list, you choose the category 43-0000 Office and Administrative Support Occupations. Reading down that list, you learn that for job category 43-6010 Secretaries and Administrative Assistants the average salary is $45,250 with an average hourly wage of between $19.08 to $21.76.
You already need to have at least three to six months of that salary banked and budgeted. You never hire someone without knowing for certain that you have the money to pay them.
Your mid-case or average-case scenario budget projections should show that you will have the income to pay yourself and the employee before you hire. You need at least six months solid of that level of earning for the company before you hire. This safely ensures that you can pay them and that your increased sales or income isn’t due to a temporary rise in demand.
If you asked, Carlie, what the hell is a mid-case scenario, you need to read up on business and take some classes before you open yours. You must do budget projections. You must assess risk levels. For any new fiscal undertaking, you run at least a worst-case, mid-case, and best-case scenario. These are financial models that show on paper with hard numbers how likely it is you will succeed. When you begin a new business, you do not have your own numbers to go by yet, so you look up what other businesses in your geographic area earned in their first year by quarter. In business, the year gets divided into quarters with three months each. When you have to show your finances to a bank or angel investor, you must provide your budget reports and quarterly reports to show the sustainability and fiscal health of your business.
Calculate a Minimum Salary By Dividing Annual Personal Expenses By 12
This method only works for calculating your own salary. I saved it until the end because you cannot use it for other people. You will not know what other people spend or how they live, so you cannot use it for anything but yourself.
Analyze your personal savings. What percentage of your personal savings do you feel comfortable using while you develop your company? This does not include your business funds. Your business startup funds are separate. If you do not earn appropriately in the first few months or years, how much of your savings will you devote to saving yourself if you experience a budget shortfall? If you have not yet found a savings option that works for you, we suggest you try opening a savings account. Below you can take a look at some of our favorite options on the market:
Let’s say that you want to start your business while keeping your current job. This is the smartest choice. When you do this, add your annual salary to your personal savings in your personal budget forecast.
Go back to your total annual personal expenses. Subtract your salary from the TAPE number, then divide it by 12. This provides you with the minimum monthly salary from your business. It lets you start with something smaller than suddenly paying for yourself all at once. (Truth be told, this was the route I chose. I started both of my businesses while still with The University of Oklahoma.)
Budgeting for Salaries
Essentially, you start small and work your way up, even when you found your own businesses. While this might sound kind of boring and like going back to math classes in school, I can promise that going the safe, slowly building your businesses route does work. You can start and grow a business that succeeds so you and your business belong to that lovely ten percent that lasts.
Let Goalry help !
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