Let Your Business Support You. Do Not Let it Own You.
Too many business owners miss the value of paying themselves in a way that shows the true health of the business. I see far too many owner’s saying, “Well, I’m happy with $X, but it would be nice if I made $Y,” or they simply don’t think they can get their business to a point where they can make what they really want. I believe that owner pay is equally important as top-line revenue, and when you underpay yourself as an owner, you’re doing yourself and your business a disservice. And, of course, there are also owners that overpay themselves, but that’s a whole other topic we’ll save for another day.
I guarantee if you own a business, you have struggled to figure out how much and when you should pay yourself. It can be tricky to figure out the what & the how when you’re also trying to build revenue. It’s easy to get trapped in a cycle of constantly skipping paying yourself or paying too little so you can meet a revenue target and make sure you don’t have to let something else go.
When you pay yourself too much or too little, you are inhibiting your future business potential.
Here’s my process that will get you started:
First, take a step back and evaluate what you personally need to live the life you have right now and where you want to be in the future. Next, start with a personal budget and thoroughly understand the cost of running your life now and what you want in 1 year, 5 years, or however far in the future you choose to look.
Answer these two questions:
What income do I need right now to sustain my lifestyle?
What income do I want to make in X months or X Years?
Don’t get hung up on the numbers in there; they’re for example only. Incomes for CEOs vary; don’t stress if you’re well below or well above these numbers.
Okay, so you have your personal income goal, what now?
Dig into these questions:
What is the gap between what I must make and what I’m currently paying myself?
What is the gap between what I want to make vs. What I am taking home now?
Start to really explore your financials and business strategy to understand why those gaps exist.
Here are some common reasons:
You’ve hired too soon and now need to maintain pay for someone else
You aren’t making enough money (that’s is whole other article)
You’ve growth expenses at the same rate as your revenue instead of looking for building efficiencies in your business
Next, build a solid 12-month plan that incorporates your personal income needs for the next 12 months.
Let’s go through an example.
You need to take home $10,000 per month (pre-tax)
You spend $5,000 / month on expenses (marketing, administrative, R&D, Etc.)
You need to save for business taxes – on average, this is 15% of net revenue, but it varies, so please consult a CPA that fully understands your business structure and locality.
You also want to make a profit (net income) each month (and yes, this can go to the owner, but if you build that solely into the owner’s compensation, you miss out on the true health of your business. I’ll skip the lecture, but this is the easiest comp (comparable metric to understand business health by industry). Let’s use 10% right now, though this varies by industry and business since anywhere from 5%-50%
Other things to consider later, but we'll keep it simple now: build cash reserves, maintain working capital in the business to meet cash flow requirements and save for long-term investments.
NOTE: of course, you will need to include the cost of goods sold as relevant to the specific business.
Breaking this down a bit more, in order to support the above, you’ll need a gross revenue of ~$18,975. (again, note this doesn’t account for the cost of goods or cost of sales)
Last, outline exactly what actions you must take to reach the plan you created above.
Here are a few places to look to get you started:
Do you need to cut expenses? (hint- check your software tools, I guarantee you’re paying $15/month on something you do need, once you start to find those $15 charges, then you start to see the larger areas where expenses can be cut)
Do you need to raise your prices?
Do you need to generate more sales? (How to do this will come in June or July, so don’t miss it!)
I get it; it’s hard to pay yourself as an owner sometimes. It doesn’t always feel like you should be paid the most or a super high amount - but that is just simply not true. In my own business, I’ve had to REALLY evaluate what I was “worth,” and that’s a challenging exercise that goes well beyond the spreadsheet calculations of your business profitability. Here’s the thing- your business likely wouldn’t exist without you. You created it, or you bought it, and you run it. Let it support you, and DO NOT let it own you.
If you’re looking for help, a Fractional CFO is KEY!
Check out Copper8 Strategies if you’re considering a Fractional CFO for your team.
