Saturday, July 7, 2012

Owner Compensation - paying yourself

What's Your Time Worth?

Most salon owners are also technicians working behind the chair. This post is for you - I'll deal with comp for non-service providers later.

Time and time again I've seen salons where the employees are paid commission and the owner takes whatever is left after bills are paid. Often there's not much left. I understand that as an owner you need to take care of your employees and take care of the business - you can't drain all the cash from the business and you can't pay yourself if it leaves nothing for rent. But you are running a business - this is not a hobby; not a charity. The business needs to be able to pay you as a technician, otherwise your hard work behind the chair is just subsidizing the pay of your team. This practice can also fool you into thinking you have a profitable business when you really don't.

Here's an example of how you can fool yourself. A salon pays a 40% commission. Our salon owner has sales of $8,000 per month as does one of her stylists. The stylist is getting paid $3,200 per month (40% of her sales). Our poor owner, however, is taking the leftovers. After she pays the rent, keeps retail shelves stocked, buys backbar supplies, pays the front desk staff she's only comfortable taking $1,500 a month out to pay herself. Not only has she not paid herself market rate as a service provider, she also got paid absolutely nothing for her time spent managing employees, inventory, insurance, payroll...

Let's say at the end of the year, when tax time rolls around her books show a profit of $12,000. But over the course of a year, she paid herself $20,400 LESS than she would have paid an employee. Her taxable income may be $12,000, but the truth of the matter is the business lost $8,400 for the year ($12,000 less $20,400).

OK, I accept that if you are just starting a business, you may need to suck it up and take a smaller salary while things get going. But this should be a temporary situation. Going forward the business needs to support you, or it's not worth the headache. Why work for $20,000 less than you could working for someone else? For the privilege of owing the bank a bunch of money and worrying about making payroll?

One final note - for tax purposes your accountant will say you need to take a "draw," not pay yourself commission. That's fine - treat it like a draw for tax purposes - but calculate the amount of your draw based on the rate you would pay someone else for the services you provide. That's the only way to truly know if your business is supporting itself or if you are supporting your business.

No comments:

Post a Comment