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.

AYB Business Coach for Builders

Builders, contractors and trades

Watch this quick video in which I explain about a couple of the unique challenges that are part of running a business in the building  and trades industry in Australia.

I have worked with many builders, subbies and trades people over the years. The building industry in Australia has many great opportunities to build Beautiful Businesses and Lives, but it also has a bunch a unique challenges. I love supporting tradies to become mature business owners and help them build Beautiful Businesses and Lives.

“Working with Roland set the path for my business to be everything I dreamed it could be”

(Brad Chapman BIC Construction)

Does this sound like you?

These are some of the things I hear people in the building industry say all the time (and to be honest, I’ve certainly said most of them myself at different times in my building days):

  • “I spend so much time training my staff and as soon as they’re all trained up, they go and start out on their own.”
  • “I spend days preparing detailed budget estimates for clients and architects but in the end they still just pick the cheapest quote.”
  • “I’m always the last one to get paid”
  • “My staff earn more money than I do.”

building trade construction builder subbie

  • “As soon as I turn my back they stuff something up.”
  • “I have no idea where I make money and where I lose money.”
  • “I’m so busy but I think I made more money when I was on my own.”
  • “I’m always struggling to pay the tax bill when it’s due.”
  • “I’m run around from crisis to crisis, extinguishing brush fires all the time.”
  • “I get stuck doing jobs I don’t actually want to do (my friend’s bathroom, my uncle’s deck).”
  • “The last 5% of any job has as many challenges and takes as long as the first 50%.”

As a former carpenter and builder myself I know what those statements are about and I have worked with many builders, carpenters, plumbers, electricians, painters and others on turning those challenges around.

“Working with Roland taught me the correct way to run a business and more importantly, run it so that I can spend more time with my family.”

(Mark Nashaty, On the Go Plumbing)

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

What you can expect:

How I’ll help you discover and build your own Beautiful Business and Life:

  • 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 about the Purpose of your business; the reason your business exists and why anybody should care about that; Know where you’re going and how you’re getting there.
  • Developing marketing plans that are simple and effective; Clients walk in the door, wanting to do business with you.
  • Building relationships with the right people; Referral marketing is the most powerful way to build your business.
  • Designing and implementing Quality Assurance and Safety approaches that are practical and appropriate for your business; Make your business run like a Swiss clock.
  • Developing systems and procedures that you can rely on; Feel confident that things happen the way you want them to happen even when you’re not looking.
  • Developing better approaches to managing and engaging your staff and your subbies, so that you won’t have to stand there and watch them all day.

“Roland helped me install the right systems into my business and helped put all the missing pieces together to form a business that is now performing 100% better on all fronts: It’s making profit, my clients love our work and my staff love working with me, and It’s a lot of Fun.”

(Brent Tamati, Direct Building Solutions)

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.