Owner’s Compensation

When starting a business, you wear many hats.  You’re the …

            Sales Rep

            Lead Carpenter

            Floor sweeper

            Job Supervisor

            Office Manager

            Supply organizer

            Bookkeeper

            CFO

            Office worker

            Customer Service Rep

            Debt Collector

            Marketing & Advertising

That’s just a few – I am sure you could add to it. 

I believe that if you’re doing all that work, you should be paid for it.  Unfortunately, owners usually pay themselves once all other expenses have been paid.  Often that amounts to little or nothing.

In order to be compensated you have to include your time in your estimates.  The reality is that your proposals won’t generate a profit if you don’t include the owner’s time.  Not only will it help ensure you get paid, it will also make your job costs more accurate and protect your Net Profit.

Ensuring You Get Paid

As you track your time you will get a good idea of what jobs you are doing.  From there you will want to establish a standard rate for payment.

There are two methods to develop a rate that will be applied to the owner’s time. 

1.  Build your standard rate

         –  Determine a reasonable salary you would need to pay someone else to do the job.

         –  Add related taxes, benefits and other labor burden costs to get an annual total

       –  Convert to an hourly rate by dividing this amount by the number of hours you expect this person to work. 

2. Estimated standard rate

Create an estimated standard rate through an educated guess.  You can do this by seeking advice and brainstorming.   If you are just starting out and don’t have time to think through the different jobs, this may be a good option for you.

Once you have a rate established you will be able to use it in your estimates.

Making Your Job Costs More Accurate

When the owner’s time is not included in project estimates:

  • Profitability of individual projects is unclear
  • Project duration (calendar time to complete a project) is unclear
  • Comparison of similar projects is difficult
  • Lack of historical data for improvements to estimating process
  • The owner’s time does not show up in the Profit and Loss Statement

In order to make wise financial choices and have accurate estimates, robust job costing is a must.

Protecting Your Net Profit

Ideally, the business owner should be paid through payroll.  Even if your business is not incorporated, this isn’t a problem.   LLCs have the option of being treated like a corporation for tax purposes and can make use of the payroll payment option.  Compensation through payroll allows you to protect the business’ Net Profit.

I also like the way the principles in the book Profit First protect the Net Profit.  With each job, the Net Profit is placed in a separate bank account – the idea is out of sight out of mind.  At the end of each quarter the business owner has the option of paying out a bonus to himself – a reward for the courage it takes to run a business. The owner should never take all of this profit.  The owner can also use the funds to pay off debt, save for a capital purchase or create an emergency fund.

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