Salary, ROI or both?

March 17, 2021. Harry Welby-Cooke

When considering going into any business for yourself you should, actually no you MUST, focus on two critical elements:

• Salary (which should be a Market Related Salary) M.R.S.
• Return On Investment R.O.I.

For short I refer to this as M.R.S. R.O.I.

Sadly many entrepreneurs simply end up living out the till. When the till has more money in it, they live a little better and when the till has nothing … well you get the picture.

As a potential business owner and a budding entrepreneur it becomes a never-ending roller coaster ride where your personal finances are as unpredictable and erratic as your business finances. Whilst you may already be skilled at the art of financial gymnastics, the fact is that you end up fighting the fight on two fronts and that’s never a good idea.

So let’s take a step back. 

You’re either currently earning a salary or at least at some stage were earning a salary. You provide your employer with skills and expertise and for that, you are remunerated at the end of the month. You are paid by the company you work for in proportion to the value you provide.  

If during this time you save a portion of your salary and put it in a bank, you expect some form of return from the bank. The money you saved, your asset, is expected to return some money back to you, namely interest in this example.

The same principle applies, or should apply, when in your own business. For the time and effort you put into managing and running the business you deserve to be paid a market-related salary. Depending on what you actually do this may or may not be quite a considerable sum of money. The company, albeit yours, benefits by not having to pay other staff for these functions and therefore allows you to draw a salary. That is however only the first of two priorities you need to focus on.

Priority #1

So your first focus should ALWAYS be to get to paying yourself a MARKET RELATED salary as soon as is humanly possible. This should be budgeted for and be a regular expense item for your business. You cannot work for free. No matter how passionate you are about your new business, and no matter how much you enjoy the freedom and flexibility it might bring, you cannot work for free.

Whilst being a business owner has many advantages it also comes with added pressure and a very different kind of stress. It’s also supposed to be a vehicle that supports you and serves your dreams and aspirations.  

It is therefore critical to ensure that you are valued for your inputs and that there is a feeling of mutual value exchanged. You will manage the business and there should be a commensurate value exchange back to you.

Like it or not as humans we are wired around the WIIFM principle – What’s In It For Me. If you don’t end up feeling like you’re getting enough in return; you will slowly build up resentment to your business. It’s slow at first and often largely sub-conscious but it happens.

Priority #2

Just as you wouldn’t give your hard-earned savings to a bank and expect nothing in return; you can’t be ‘giving’ your new business money and expecting nothing in return either. 

You’d never make a fixed deposit at the bank and not expect any interest back from them. In fact, with the advent of online or app based banking you’re probably checking your monthly interest, a couple of times a month.

So why would you ‘give’ your business money and expect nothing in return?

I often hear things like, “Does it really matter?”, “It’s my business anyway” or “It’s all my money isn’t it”. The reality though is you have two functions as a business owner. One is an employee role in the work that you do and the other is a shareholder role as the owner of the company. The former should provide a salary and the latter a risk related return in the form of profits/dividends.  

If you’re not going to be able to get both a salary AND a return, you can just as well not even start the business. Rather invest the money in something else and stay where you are. Other people can manage your money and you simply just collect the fruits of their labour. Skip the full spectrum of pressure and stress as a business owner and rather earn a market related salary working for someone else.

Now obviously getting to M.R.S. R.O.I. won’t happen overnight. Businesses take time to get to the place where they can pay you what you’re worth and probably even a little longer before you can get a decent return. You do however need to chase both and any budgeting you do should make provision for this.

If you don’t budget for BOTH Salary and Return you invariably just get one of them. Because the Return on Investment is not urgent, isn’t paid monthly and doesn’t really affect your personal survival it is normally the easiest to neglect and delay. Don’t let this happen to you.

Remember as a business owner you will have two roles. Make absolutely sure you’re remunerated for BOTH!

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