Are you a business owner who’s asked themselves ‘How much should I pay myself?’ at least once? This is the episode for you! Full transcript below…
Welcome to the Business Numbers podcast. I’m your host, Ben McAdam. I’m a profits coach, virtual CFO, and entrepreneur, and I’ve created this podcast to help you grow your business profits and understand your business numbers without judgement, and without burying you in a whole bunch of jargon that you don’t need. Just actionable tips and case studies to help you grow your business. For show notes, go to the website businessnumberspodcast.com.
Here’s a question that’s come up twice in the last week, once in a client call, another time on a catch up call. It’s ‘How much do I pay myself?’- this is the business owner asking. And so there are a few tips that I’ve shared and I thought it would be useful to share it with you since it helped them.
First off, the most important idea is that you want to make sure that the business can afford to pay someone else to do the tasks that you are doing in the business. Otherwise, you’ll get stuck. You’ll be the only one that can do them because you can’t afford to pay somebody else to do them. There’s a concept that I often talk about that there is you- the business owner and you- the worker in the business. You need to be able to pay you- the worker in the business because you want to fire yourself and replace you with someone else. It’s like when your business first starts out you do absolutely everything. But as it grows, you can’t do all the low-level stuff because then you can’t make the big strategic decisions or work on the big impactful projects. You’ll be stuck doing all the urgent stuff because you can’t pay a basic customer service person, or account manager, or bookkeeper.
So it’s really important to fix the problems in your business. That means that you can’t pay someone a market rate to do the tasks in it. It’s really important to fix those when your business is smaller because it’s easier when your business is smaller. So for example, if the pricing is too low, or your margins aren’t good, or your business model needs to be fixed so that you can afford to pay people to do all the work well, it’s easier to fix that problem when your business is small because raising your prices on existing customers is a doable challenge, but it’s better to not have that challenge come up at all. Or only one or two or three or five customers rather than 50 or a hundred when your business is bigger.
So the most important idea is to make sure the business can afford to pay someone else to do the tasks that you’re doing.
After that, you’ve gotta balance two factors. You need to pay yourself a minimum amount that covers your personal expenses, otherwise your motivation might drop for working on this particular business, or you might have stresses from your personal life that carry over into the business. Including getting pressure from other people or even yourself to stop wasting your time and get a job, or move on to another business, or something. So if you’re paying yourself a minimum amount to cover your personal expenses, you won’t have that risk of getting distracted by other money-making opportunities. So that’s one factor, to balance.
The other factor is that you don’t want to pay yourself so much that you bleed the business dry. So we’ve got a bit of a Goldilocks situation here, not too cold, not too hot, but just right. Not too low that you can’t cover your personal expenses and not too high that you bleed the business dry, because the business needs a certain amount of money left in it. Certain excess of profit or cash for survival, for lean times and for growth, unless you’ve got funding and you’re being intentional about running your business at a loss it still needs to have an excess of profit, or an excess of cash to survive the lean times, and to have a war chest to invest in growth, or capitalize on those rare opportunities that come up that you can only act on if you can act quickly and have the reserves.
So, one last point I wanna make is you also kind of need to think about your goals. As always, I keep coming back to goals. Sorry if I sound like a broken record to those of you who know me. You need to think about your goals, especially if you want more than the business can currently afford to pay you or currently comfortably afford to pay you.
So for example, if you want to pay yourself $ 1 million a year, no problem, you can do that one day or maybe now. All you need to do is break down what the business would need to look like to pay you that much. So how much revenue would it need to generate? What number of customers would you need to have? What’s the margins you would need, the gross margins you would need to be running at? What’s the amount of marketing spend relative to your revenue. How much would you be investing in software? How much would you be investing in an admin team? How much would you have spent in education and training? Like what does your business look like at the point when it can afford to pay you $1 million a year, so you’ve got a very clear goal and a very clear picture about what to work towards. This is something I do with all of my clients when they first sign up and it’s an exercise that gives tremendous clarity and usually shows that your goal isn’t that far off. Let me know if you wanna learn more about that and I’ll do an episode on it to walk you through the process.
So quick recap. How much do you pay yourself? Well, it’s a bit of a grey area, but here are the factors that you need to consider. If we’re not talking one-on-one I can’t give you specific advice, but these have helped a lot of people, these points.
First, make sure the business can afford to pay someone else to do all the tasks, fix whatever problems exist in your business that mean that it can’t afford to pay someone else market rate. After that you’ve got to balance between too hot and too cold on the Goldilocks scale. If the business isn’t paying you enough to cover your personal expenses you’ve gotta pay yourself a minimum amount and kind of the maximum amount you can pay yourself is you want to leave a certain, you know, a little excess of profit and cash in the business building up, unless you’ve got funding and you’re being intentional about running at a loss.
And then finally think about your goals. So, you know, “How much should I pay myself?” is the question about the present. If you were to say “I want to pay myself X dollars per year”, then that’s where you have to think about your goals. What is that amount and build a picture of what your business looks like and start working towards it.
So hopefully this is helpful, hopefully it makes sense. Let me know. There is a contact form, or you can reach out to me through social media or go to my website profitscollective.com. If you have any questions, let me know that as well. I’m always happy to help, would love to feature a question and answer that on a future episode.
Thanks for listening to the Business Numbers podcast. Subscribe in iTunes, Stitcher, or on our website, businessnumberspodcast.com. Also on the website is a free basic concept webinar and a contact form for submitting questions that you’d like me to answer on a future episode.