How much should I pay myself in my business?

pay myself business owner

how much should I pay myself as the business owner

Why it matters what you pay yourself as the business owner.

Business owners often don’t pay themselves at all, but just draw money out of the business account when they need it. At the end of the year, the accountant adds up all the “draws” and books it to something appropriate in the balance sheet to make the Tax Department happy and it’s all good. Sp why does it matter how much you pay yourself, why should you pay yourself at all and how much should you get paid?

Clearly, a big factor in how much profit your business makes and whether or not the business has the cash to pay it’s bills is how much money you draw out of the business at any one time. If your business turns over half a million dollars and you have 4 employees and an office and you pull out $200K yourself every year there may not be enough money left to pay for Cost of Sales, staff wages and overheads (or tax, for that matter), and if you pull out nothing at all, it might look like your business is enormously profitable. Your wages, drawings or dividends are a significant factor influencing the health of the company.

So wat’s wrong with letting your drawings depend on whether there’s enough money in the bank to pull some out?

As I’ve said many times elsewhere:

If your business doesn’t make profit, it’s a hobby.

A healthy small business ought to make somewhere north of 5% net profit before tax, every year. I generally advise my clients to aim around 10% as a guideline. (10% of revenue… so for every $100 in sales, the business ends up with $10 of net profit). There is no golden rule about this number, but it’s a useful guideline in most cases.

Net profit is the money that’s left after all costs of the business have been paid, and you, the owner of the business are absolutely one of the business’ costs, a major one at that. And you rightly should be a cost to the business, just like the electricity and the rent and the mobile phone bills and the staff. Without you the business can’t function. You are the CEO and general manager, the head sales person, the chief cook as well as the bottle washer. In any other business, all those people would need to be paid and probably quite highly, and so should you. If you do not pay yourself a proper wage, you’re not professional and nor is your business.

Dribs and Drabs for the boss

I recently started working with a client in an architecture business. The client has 4 staff plus himself and he pays his staff and all his other costs, but he only gets paid in dribs and drabs when there’s money available. He showed me his P&L and proudly pointed to the net profit his business made last year. But when I asked him how much the business was paying him, it turned out that he just drew out some money every now and then and that his drawings didn’t show up in the P&L. In effect, if he were to pay himself as much as his lowest paid staff member, he would have made a loss last year. In other words:

My client wasn’t running a business at all, he was running a hobby.

My client has now implemented a weekly minimal wage for himself, run through the books as a wage, showing as a wage in the overheads and we’ve updated his business targets to be in line with the new reality. The business is not out of the woods yet, but there is a new air of professionality in the practice and my clients is learning to think like a business owner rather than a hobbyist.

How much then?

The second question therefore is: How much should I pay myself?

Again, it may seem that there is a certain arbitrariness to this question. But the answer is actually quite straightforward:

You should pay yourself as much as it would cost you to pay someone else to take over from you.

Assume you want to go on sabbatical for a year and bring in a CEO to run the business for you… Doing everything you do for the business now… What would that cost? $80K, $100K, $120K? Whatever the answer to that question is, that’s what you ought to pay yourself.

This may well be unachievable right now, (it is for my client… He can only manage about $60K right now), but it’s certainly something you should work towards over the next year or so. It will put the business on an entirely different footing and every time I introduce this discipline with my clients, the business starts to change completely… guaranteed.

Would you like to download my free 12 Question Cheat-sheet to help you find your next Coach? Click here.

The biggest secret to growing your service business

secrets growing service business

secrets of growing service business

Do these 5 things right every time and your business will never stop growing

I’m often asked by clients to help them grow their service business. I nearly always tell them that growth is easy in a business based on services, anyone can grow a small business.

All you need to do is this:

  • Deliver what you promise
  • At the time you promise it
  • For the price you promise it
  • For a profit and
  • With a smile.

Every time…

That’s all… Honestly

If you do those 5 things, every day, customers will break down your doors, because so few small businesses do.

Most small businesses fail doing those 5 things consistently and stunt their growth, because of the classic problem of small business growth:

Scale-ability.

It’s easy when you’re small

You see, when your business is small, you and a couple of people delivering all the services, be it plumbing, washing machine repairs, fixing cars, bookkeeping, designing websites or building houses, then it’s easy to manage and be in control of everything. You can make sure things happen the way you want them to happen.

Once you start to grow with 5, 10 or more employees, and you have a number of teams, or vans on the road, suddenly you’re not in touch with everything that goes on anymore. You don’t even get to meet all the customers and you won’t personally see all the services that get delivered. You have to rely on others, and hope they do things the way you want them done. That they communicate with customers they way you expect them to and that they take their dirty boots off before they traipse in through the house.

Managing by keeping your fingers crossed.

And guess what? It doesn’t work. Your customers start being less than happy, they start looking elsewhere, you’ll believe you need to lower your prices to keep them and it all becomes a dog’s game.

So here’s the biggest secret of all to growing your business:

Learn to say no.

Learn to say no, until you can handle the growth. Never taken on any work, any new business, unless you are confident you can deliver it to those 5 standards above.

If you do that, you’ll be in control of your business, you won’t have to compromise on price and you will build a Beautiful Business and Life. And the customers? They’ll keep coming. There is never a shortage of customers for businesses who deliver on all of their promises, with a smile… I promise you.

Read more

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AYP Business Coach for Professionals

Architects, Designers, Creative

Agencies, Professional Services

Watch this quick video in which I talk about a couple of the unique challenges that come with building a business based around creating beautiful things: buildings, websites, logos, photography, videos, etc.

I have worked with many architects, designers, and owners of creative agencies in the last 11 years. I love the passion that designers have for their profession and their craft. There is a special set of challenges in marrying business with the design mindset.

“Roland helped me put my work into a bigger context which defined the purpose of my business and brought clarity to my decisions.”

(Michael Hill, Lightwell)

Does this sound like you?

These are some of the things I often hear architects and design professionals say:

  • “I love creating amazing buildings (websites, offices, brochures, brands), but clients rarely want to pay for the time it takes to create… Good design takes time.”
  • “My clients expect me to be at every meeting and to personally design every detail of their project, they insist on speaking to me personally instead of my staff.”
  • “I don’t know which projects I make money on and which lose money.”
  • “My staff earn more money than I do.”

architect designer agency

  • “Nobody in my practice has a clue what it costs to run this business.”
  • “Clients use me as a free consultant and then they go shopping for the cheapest quote.”
  • “I don’t seem to be able to move away from small alts and adds/ little websites… etc”
  • “I’m always waiting to get paid”
  • “I run around from crisis to crisis all day.”
  • “I’m a designer, not an accountant.”
  • “I just seem to be managing people these days instead of designing amazing buildings/ websites/ brands.”

Click here to download my Free Guide to finding the perfect coach or mentor for you.

Building a design agency that is founded on your passion and creativity can be especially tricky at times. Your clients come to you for your creative reputation and they often resist dealing with your staff. And turning a design practice into a profitable business while being true to your principles is a constant balancing act.

“Roland helped transform my business daydreams in to a practical, pragmatic and actionable plan… And then we made it happen”

(Adrian Black, Blackline Retail Design and Management)

What you can expect:

How I’ll help you build a business that stands the test of time:

  • Implementing better bookkeeping, workflow management and project management systems. Your fingers on the pulse of all the key indicators of the health of your business, as opposed to keeping your fingers crossed.
  • Developing absolute clarity abut the Purpose of your business; the reason your business exists and why anybody else would care about that. Know where you’re going and how you’re getting there.
  • Building relationships with the right people. Referral marketing is the most powerful way to build your business.
  • Developing marketing strategies that mean you get to build your business with the right type of clients. Clients walk in the door, wanting to do business with you.
  • Developing and implementing Quality systems that allow you let people get on with things confident the work will be consistent. Make your agency or practice run like a Swiss clock.
  • Developing better approaches to managing and engaging your staff consultants, so that you won’t have to stand there and watch them all day.

“Working with Roland transformed me and my business. It now flows. It’s less stressful and more enjoyable.”

(Geoff Anderson, Sonic Sight)

Five Steps to Discovery

If you recognise some of those statements above and you’d like to explore how I can help you overcome some of those everyday struggles, click here to book in a free Discovery Coaching Session now as part of my Five Steps to Discovery Process, designed to help you discover and build your own Beautiful Business and Life.

More reading, books, surveys, webinars

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