How Much Should an Owner Take for Wages?
A business owner has to set his own salary, which can be a difficult task. Even if he has an accountant, an owner should know how to read his company's accounting statements. The appropriate salary level for the owner is going to change as time goes on; and is based on how the company performs.
Other People Are Reading
-
Sole Proprietorship
-
If a business only has one owner, it is called a sole proprietorship. With this type of business, there are no stock holders because the owner, or sole proprietor, holds all of the interest in the business. If the business does well, the owner does well and vice versa.
Balance Sheet and Owner's Equity
-
On a balance sheet, owner's equity is determined by the following formula: Owner's Equity = Assets - Liabilities. Assets include all tangible and intangible property the company owns such as cash, land, upgrades and improvements to land, property, money owed to the company, prepaid insurance, inventory, supplies, temporary investments and buildings, according to Accounting Coach. Liabilities include money the company owes in the form of wages, settlements, notes, salaries or any other debt the company owes. Therefore, if the company were to liquidate, or sell, all of their assets and pay all of their debts, the difference would be the owner's equity.
-
Income Statement
-
On an income statement, net income is calculated by using the following formula: Net Income = Revenues and Gains - Expenses and Losses. Revenue includes sales revenue, interest revenue and any profit seen on the sale of an asset. For example, if you sell a company truck that is worth $10,000 for $15,000; you earn $5,000 in revenue. Expenses and losses include the cost of your merchandise, the cost of paying your employees bonuses or commission, the cost of your office supplies and equipment, advertising expenses, interest expenses and any settlement or lawsuit expense your company pays, according to Accounting Coach. If your net income is a positive number, your company is seeing a profit.
Economical Implications
-
Accounting theory looks at company performance by examining the income statement and balance sheet for a positive net income and a substantial amount of owner's equity to ensure a profitable company. Economic theory uses the break-even analysis. Your company is doing well when your sales begin to exceed your "total cost." Total cost includes all of your costs such as your monthly rent on your establishment, the cost of salaries, the cost of inventory, the cost of insurance and all other costs it takes, each month (or quarter) to operate your business. Economic theory subtracts all costs from sales for a given period. If the number you are left with is zero, your company has broken even.
Conclusions
-
If you are a business owner, or looking to become one, you should know that in the beginning, your salary is going to be modest. All companies start off in the negative because it takes money to make money. You have to pay your first month of all of your costs before you begin sell your goods or services. During that time period, you as the owner should take just enough money to cover your bills and basic needs. Owner's equity is not money; it is the company's assets, so you cannot pay yourself based on that figure. An effective method to use is the break-even analysis. Once you break even, keep in mind that you have done just that, you broke even and are not yet seeing a profit. On the other hand, once you break even, that is a good sign that you are on the right track. When your company begins to see a substantial profit for at least three months, then it is time to raise your salary. If your company's sales are 60 percent higher than your company's cost, a fair raise would be a no more than 60 percent raise. Then, keep your salary at that level for six months to ensure that your company's profits continue to increase. Evaluate the situation at the six-month point and if your company is then 30 percent more profitable, you can choose to give yourself another 30 percent raise, according to Entrepreneur Magazine.
-
References
- Photo Credit money in hand image by Bruce MacQueen from Fotolia.com
