Owning a food truck and putting yourself on payroll can be tough. Ultimately, food truck owners have to have money to live off of, but they may struggle with determining how much that should be. So how do you determine how much to pay yourself?
Not all food truck owner salaries are created equal; there are often huge differences. Some pay themselves a base salary. Others calculate their salary as a percentage of their food truck profits. So what is the correct compensation for a food truck owner?
Common Ways To Pay Yourself For Food Truck Startups
Pay yourself enough to get by
The first strategy has the vendor pay themselves just enough to get by during the startup phase of the business. This will continue until your mobile food business is operating in the black. The idea is to minimize your overhead in order to decrease the amount of capital required to make your food truck a success. Also, by reducing your overhead, your net loss will decrease or your net profit will increase, providing your food truck with lean operating requirements until it becomes established.
Pay yourself what you are worth
Build your pay into your business plan so you have an accurate portrayal of how much capital you will need in order to finance your business. By paying yourself what you are worth, you aren’t painting an artificial portrait of the business that will change once you get into the black.
So how do you know what is enough to get by and what you are worth? You have to do some planning and then budget that amount into your income and cash-flow projections so that you know how much operating capital you will require during the formative stages of your food truck’s development.
Projecting Your Salary
As we mentioned, there are two methods you can use to determine your pay during startup. The first is paying yourself enough to meet basic living requirements. Depending on your situation, that means enough income to cover your bills, food and other miscellaneous living expenses. Strike all other discretionary items from your life for a while and get used to just the bare necessities.
To determine your basic worth, start by writing down your current salary or hourly wage. That is what your market worth is at this point in time. This is what you want to make at a minimum going into the business. But market worth isn’t basic worth. There is a difference. Basic worth is your market worth plus a percentage increase based on three to four times the rate of inflation.
Why is there a percentage increase from market worth? As we mentioned, market worth is a minimum, a starting point. It doesn’t take into consideration the increased responsibilities of running a business and your value to the business as its owner. With these factors taken into consideration, your basic worth is determined using the following equation:
Basic Worth = (MW/12) * (I *4)
In this equation, market worth (MW) is your total annual pay minus any bonuses or overtime. Divide the annual market worth by 12 to get a monthly amount. Then multiply this by the inflation percentage (I) multiplied by 4.
Suppose you are making $15 per hour at your current job. At $15 per hour, your annual pay would be $31,200. Your annual pay of $31,200 would then be divided by 12, resulting in a monthly income of $2,600. At the time you are determining your basic worth, the rate of inflation is four percent. Multiply four by four, and the percentage which you will add to your current monthly income is 16 percent. Your basic worth would be $36,192 annually.
Of course, these are just suggestions to use when determining what you will pay yourself during the period of startup to break even. You can use any type of system you wish. The idea is to provide you with a realistic figure.
Pay Yourself After Breaking-Even
Determining your salary during the startup phase of your food truck is important because you need to include your income in the financial statements you will use to obtain financing for your business. Even if you are financing your food truck yourself, you need to have this information; otherwise, your overhead won’t be realistic and any income, break-even and cash-flow projections you will perform will be inaccurate.
Keep in mind that during the first year of business, it typically takes six to nine months to break even. Once you reach break-even, though, do you change your salary? If you think you can, then you will make one of the most common mistakes a food truck owner can make.
Just because you’ve reached break-even, that doesn’t mean your food truck is profitable. If you’re paying yourself just enough to get by, raising your salary is going to increase your overhead, which will require a greater amount of revenue from the business in order for expenses and income to match. In other words, you’ve just put your food truck into the red again. If you’re paying yourself your basic worth, then you shouldn’t need to raise your salary.
Paying Yourself Bonuses
After you’ve reached break-even, the best method to increase your pay is to tie any income above your fixed salary to the growth of the business. Therefore, if your food truck business grows 10 percent during the first quarter after break-even, take your base salary and add a 10 percent bonus to it.
Continuing with this example, if your base salary is $3,016 per month as determined above, you would multiply that number by three (number of months in quarter) and then multiply by 10 percent.
Bonus = (3,016 * 3) * .1 = $905
After your first year in business, once you’ve passed break-even, reevaluate your food truck business to determine its annual growth and increase your salary accordingly.
Let’s say that your food truck sales have grown 50 percent during the first year after you break-even. Your current salary level is $36,192, based on the basic worth example. Multiply that salary by 150 percent and you will come up with your new annual pay, $54,288. You can retain the bonus income after the first year of break-even if you like. After all, why not compensate yourself for the increased performance of your food truck?
The Bottom Line
The best way for vendors to effectively know how they should pay themselves is to review their financial statements monthly with your accountant. While this article can be used as a guide, we always suggest you talk things over with an accounting professional before pulling the trigger.