Markup is one of the most important financial calculations businesses can make. However, it is often difficult for new businesses to find the correct markup that makes financial sense for their business. Consultant Michael Stone outlines how newer businesses, or businesses without historical numbers, can calculate the correct markup for their businesses in Markup and Profit.
Calculate your personal financial needs (i.e. the money you need to earn to pay all your personal bills) then divide that figure by an appropriate percentage based on how long you've been in business.
Example: If you've been in business fewer than five years, divide your income needs by 8%. That will tell you how much business your company must sell, build and collect so it can afford to pay that salary. Don't forget to include a percent for saving and giving, and a percent for income tax. Let's say you need to take home $60,000 a year before taxes. Divide $60,000 by .08; your company needs to produce $750,000 to pay that salary.
As time goes on, you can bump the percent that you can pay yourself as salary but I'd limit it to 10%. You don't want to create cash flow problems for your business by paying yourself more in salary than the company can afford.
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