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.

AYW Business Coach for Studios and Workshops

Studios, Salons and Workshops

Watch this quick video in which I talk about some of the unique challenges that come with building a business that operates like a salon, studio or a workshop… on the face of it very different kind of businesses but there is also a really specific set of common factors.

Over the past 11 years I have worked with many owners of what I’ll refer to here as Studios. Studio business are all about having jobs booked in on a schedule and having to complete the job inside the schedule. In that way a hair or nail salon operates quite similarly to a mechanics workshop. The Studio business model has all kinds of unique challenges.

“Working with Roland has been the most productive time I have ever dedicated to myself and my business.”

(Anna Field, The Paddington Beauty Room)

Does this sound like you?

These are some of the things I often hear owners of Studios, Salons and Workshops say:

  • “As soon as I’ve finished training my staff, and they start to work out well, they leave me again.”
  • “I can never know how busy the day or the week is going to be, rostering my staff is a nightmare.”
  • “I get so many tyre kickers ringing up, they waste so much of my time”
  • “My staff just don’t care the way I do, and my customers know it.”
  • “My staff earn more money than I do.”

  • “I do everything I can to look after my staff but they walk all over me.”
  • “To be profitable we have to focus on ‘upselling’ our clients, but we just don’t seem to be very good at it.”
  • “I keep my fingers crossed every day that we don’t get too many cancellations or that we’ll have enough walk-ins.”
  • “I spend a fortune advertising the studio in the local rags, but I’m not sure it actually pays off.”
  • “I have to be on the Studio floor all day to make sure things don’t fall apart, so I can only work “on” the business at night.”
  • “I focus a lot on safety in the Studio, but I live in fear of being audited by Workcover one day.”

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

Running a Studio type of business can be incredibly stressful and it can feel like all you can do is react to what happens rather than pro-actively build your business. Finding and keeping the right staff is often one of the greatest challenges, industry wages are generally relatively low and hence the staff are often highly itinerant. Marketing on a tight budget and time management are also often particular challenges because of the many distractions the day brings.

“Great results require great effort and great guidance, Roland is such a guide”

(Sebastiaan de Jonge, KwikKopy Auburn)

What you can expect:

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

  • Finding absolute clarity about the Purpose of your business and developing a comprehensive but practical business plan and marketing plan from that foundation. Know where you’re going and how you’re getting there.
  • Improving the look and feel of your business; Clients feel comfortable and trust your business is going to give them what they need.
  • Developing HR thinking and systems that make the process of hiring, engaging and keeping great staff easier. Build a great engaged team of people.
  • Implementing better bookkeeping and workshop management systems, so you know where you make money and where you lose money. Your fingers on the pulse of all the key indicators of the health of your business.
  • Strengthening sales skills throughout the business; Sales conversion rates double and triple.
  • Improving health and safety discipline and management in a practical way. Less accidents, lower premiums, less sick days.
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

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