You work so hard to build your business. You owe it to yourself to make sure you get paid.
Many entrepreneurs build businesses that appear successful, with plenty of clients and sales. But if you look closely you’ll often find that after months or even years of operating, the owners are not paying themselves consistently or, sometimes, at all.
Are you paying yourself the full value of your work?
I talk with business owners all the time who haven’t paid themselves in years. They’re constantly worried about paying for inventory, making payroll or expanding sales, so they end up sacrificing for the business.
I help business owners pocket a salary and realize profits from their businesses, which are key factors in building lasting and sustainable companies.
Here’s my first piece of advice: don’t wait to take profits!
Taking a profit and paying yourself for your work are simple practices that can start no matter what stage your business is at, even if you’re a startup. Here are two simple steps you can take to give yourself a raise.
Step 1: Set clear thresholds for how much money you personally need, want and desire from you business.
Need: Ask yourself what is the minimum you need to cover essential bills and expenses. At this level, money may be tight, but you’ll take care of your basic needs. This amount is your startup or beginning pay. You earn it from your day-to-day work in your business. You should be paying yourself this amount as often as you pay your other employees.
Want: What dollar amount will allow you to live comfortably without financial stress? This is your immediate next goal. You’ll know it’s time to give yourself a raise when your company begins to deliver reliable quarterly profits.
Desire: Dream BIG! If you could have it all, what would your income and wealth look like? One of the ways we hold ourselves back is by forgetting to dream big. Without the dream on the horizon, we get stuck in the day-to-day grind and fail to inspire ourselves or the people around us. This is the first step toward burnout. Don’t go there!
Your profits are for supporting your dreams and aspirations. Taking some of the profit your company earns and spending it on a celebratory event is your reward for the hard work of being a business owner. But since that big dream may take a while to realize, make sure you also have smaller celebratory events or purchases in mind. That way you’ll have plenty of opportunities to reward yourself and treat your family as you build your company.
Sounds good, right? But where will the money for all of this come from?
Step 2: Put profit first: Manage your cash for profit starting today
From your very next (or first) deposit from sales, you can and should allocate money for owner’s pay and for profit. You set the amount for profit and owner’s pay as a percentage of revenue based on the size of your business. Then set up two savings accounts: one called “Owner’s Pay” and one called “Profit”. Move the specific percentage you’ve designated into each of your savings accounts starting with your very next deposit.
You can do this immediately, even if you transfer as little as $1 per deposit. Once you set the habit you can increase the percentages as your business grows and you begin to control your other costs. Use the Owner’s Pay account to pay yourself regularly (monthly or bi-monthly).
Let the funds in your Profit account grow over the course of a full quarter (three months). At the end of the quarter, take half of the cash in your Profit account and give yourself a dividend from your profits (and use it to celebrate!). Use the rest of your profits to pay off debt, start a rainy-day fund for your business or invest in growth.
Increase your allocations for the next quarter. For example, you could start at 3% for Owner’s Pay and 2% for profit. In the next quarter, move up to 5% for Owner’s Pay and 4% for Profit.
In the following quarter you can raise your allocations again and open a third savings account for your tax payments so your business can pay all the taxes you’ll owe on income and profits.
This is a behavioral method of cash management from the book Profit First by Michael Michalowicz. I started using Profit First in 2014. It has completely changed how I manage my business. I’m also a certified Profit First Professional, which means I’ve used Profit First to help dozens of businesses become more profitable.
Last October, for example, I began working with a Brooklyn, N.Y. yoga and wellness center that lost money throughout 2015. The first step for this business was to raise some of its prices. Then we created specific sales goals and strategies for each service offered. The company implemented Profit First in January 2016. In April (after only three months of using this system) the company gave profit dividends to each owner and paid off $2,000 of debt.
This kind of change starts off small, but builds to create tremendous success. With a little planning and some good habits, you too can start paying yourself and banking your profit.
For help boosting your profits, contact CFO on Speed Dial or get yourself a copy of Profit First by Mike Michalowicz.