How to Allow for Your Personal Cost in Your Business: What Could You Earn Elsewhere?
When assessing the performance of your business, it is easy to overlook one of its most important costs: you.
Many business owners pay themselves whatever is left after all the other expenses have been covered. Some take very little from the business during difficult periods, believing this sacrifice means the business is still profitable. However, if the business cannot afford to pay you fairly for your time, skills and responsibilities, it may not be as successful as it appears.
A useful way to calculate your personal cost is to ask: what could I earn elsewhere?
Consider the salary you could reasonably receive if you worked for another business in a similar role. Take into account your experience, specialist knowledge, industry contacts and management responsibilities. Remember to include superannuation, paid annual leave, sick leave and any benefits that might come with employment.
For example, you might be able to earn a salary of $100,000 plus superannuation elsewhere. If your business pays you only $50,000 while requiring longer hours and greater responsibility, you are effectively contributing at least $50,000 of unpaid value each year.
There may be good reasons to accept a lower income temporarily. A new business often requires investment and patience. You might also value the flexibility, independence or long-term potential of owning the business. These benefits are real, but they should be recognised as conscious choices rather than used to disguise poor financial performance.
Your time also has an opportunity cost. Every hour spent completing routine administration, fixing avoidable problems or serving an unprofitable customer is an hour that cannot be used to win valuable work, improve the business or enjoy your life. Hiring help may seem expensive, but it can be worthwhile if it releases you to undertake higher-value work.
Include a realistic market salary for yourself when preparing budgets, setting prices and calculating profit. Your wage is the cost of the work you perform. Profit is the additional return you receive for owning the business, investing capital and accepting risk. They are not the same thing.
Review your position at least once a year. Compare your income, hours, stress and future prospects with the alternatives available to you. This does not necessarily mean you should close or sell the business. It may show that you need to increase prices, change your customer mix, delegate more work or redesign your role.
Your business should create value for you, not simply depend on your unpaid effort. Knowing what you could earn elsewhere helps you judge its true performance—and whether it is properly rewarding you.
Photo by Etty Fidele on Unsplash