So
you've started your own business and now the money's rolling—or maybe
just trickling—in. Now it's time to start drawing a salary. But how
much? Should you draw out what you need to cover your living expenses?
What your growing company can afford? Or how about the pay you
sacrificed to go solo?

Ideally, all three—and much
more—will factor into your salary decision. While you may be willing to
take a hefty drop in pay to get your business rolling, paying yourself
far under market does both you and your business a disservice. "It's
not sustainable," explains Peter Hupalo, author of Thinking Like an
Entrepreneur. "You may be able to get by, but for how long? And it
won't look good to potential investors or buyers down the road."

Your Minimum Wage
Your living expenses, financial situation, and comfort level with
drawing on personal savings all come into play when determining your
salary needs. Start by putting together a comprehensive list of your
annual expenses. Be vigilant. A single omission can throw your
budget—and, by extension, your company's—off.

Next,
divide the total by 12 for the monthly salary you need to cover your
expenses. Then decide if you feel comfortable drawing on your
savings—and, if so, how much you can draw upon. If you have other
income that you can devote to living expenses, add it to this personal
savings figure. Subtract that total from your total annual personal
expenses, and divide by 12 for the bare minimum salary you can afford
to take by supplementing your income. Now you have your minimum pay
range, from what you can afford to get by on by supplementing your
income to what you need to cover living expenses.

Your Pay Plan
Next it's time to crunch the numbers. First, check the cash-flow
projection in your business plan to see if your business will be able
to cover your own draw as well as all your other operating expenses. If
you're lucky—really lucky—your cash flow will have a surplus large
enough to pay both a hefty salary and to reinvest in your company.
Unfortunately, that's rare. Most new businesses operate at a loss for
between six months and two years. The bottom line? Plan on starting out
with pay in your minimum salary range and boosting your compensation as
your company grows.

For
many early-stage startups, a base salary with a bonus structure that
kicks in as the business reaches profitability is the ideal way to
handle owner's compensation. You might, for example, plan on taking a
set salary until your business breaks even, at which point you'll
earmark a share of the profits each fiscal quarter as an owner's bonus.
Your salary structure will also evolve with your business. As
businesses evolve, cash flow models and capital can change
dramatically—which means it's essential to reevaluate on a regular
basis and adjust accordingly. When your company establishes a track
record of consistent profitability, you'll want to reevaluate.

"Don't lock yourself in," says Hupalo. "The needs of both you and your business will change over time."