If I could wave a magic wand and be able to help every entrepreneur (especially the new ones) understand only one concept, it would be about how they pay themselves as the owner. I’m tired of seeing them not pay themselves, underpay themselves or pay themselves erratically. I’m tired of watching them celebrate milestone or profitable months in their businesses knowing they’re personally not making anything.
Let’s change that.
Your first financial goal: pay yourself
When you first start a business, you’re usually not going to be able to pay yourself right away. That’s okay. Bootstrapping in the beginning helps to set your business up for success later on. However, let’s be clear that it should be one of your first financial goals to grow your business to the point it can pay you regularly.
Your business isn’t profitable or viable until you are paying yourself what you’re worth.
Read that again. If your business is showing profit on paper and you’re not paying yourself, it’s actually not profitable because it’s not paying all of its rightful expenses (your labor).
A regular and market-based salary
Once your business can pay you, how often and how much should it be?
First, it should be regular payments, as if you were getting a paycheck. Monthly, semi-monthly, bi-weekly, it doesn’t matter what frequency you choose as long as you pay yourself the SAME amount at regular intervals. This helps you manage your personal household budget as well.
How much? You should be receiving an amount equivalent to a market-based salary. If you had to hire someone to do everything you do in your business, what would you pay them? That’s what you should pay yourself. This shows the business can afford and sustain paying for the work that you do.
You can start off with smaller amounts doing regular payments and work up to the amount that would equal the market-based amount. Just avoid taking money out of the business whenever you see a large balance in the bank or you need it for something personally. Have a strategy for this and it will set up both you and your business for the future.
Pay yourself profit
Finally the fun part - paying yourself profit!
It’s important to make a distinction between your business compensating you for the work you do vs. paying yourself profit. We covered paying yourself for your work above. Paying profit is the ROI you get for being a business owner.
Create a strategy for making those extra profit distributions. How often are you going to do this? How do you determine the amount? There are a lot of different ways to handle this, and some of it might depend upon your business structure.
It may be tempting not to take profit distributions in the beginning as you are building, but I highly encourage you to do so anyway, even if they are small. Begin the habit now and then later on it will be pretty cool to see your profit distributions grow along with your business.
We all start businesses with big dreams that include financial goals, or at least dreams that money can help you achieve. Don’t ignore yourself once you start. Have a plan for paying yourself both for the work you do and for profit. Your business will be more financially stable, and you’ll make more money. Win, win!