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?
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.
I believe personal development is integral to developing your business. The two always go hand in hand. It’s the reason I refer to myself as a Business – Life Coach, rather than a business coach. It all boils down to one word: Leadership.
Most business owners, in the deepest dark reaches of their mind, are afraid they’re not quite cutting it as entrepreneurs. Oftentimes, as business owners, we start our business on the back of a profession, a trade, or a skill we have learnt (plumber, architect, accountant, software developer, designer, mechanic, chef, retail manager) and we feel confident in that particular skill. Starting a new business is an enormous buzz. But once we start a business based on that profession, we suddenly realise it takes a lot more than being a great plumber to build a great plumbing business.
Time to think, doing nothing
Where’s the toilet paper?
Few business owners have studied to be a business owner, and even those who have attained an MBA or similar qualification, find they’re not prepared for the realities of life as a small business owner. Suddenly everything is down to you, the big decisions about whether or not to bid for that contract, or hire that expensive employee, or sign the lease for the new office, as well as making sure the toilets are stocked with toilet paper and that there’s ink for the printer. To top it off, your people look to you to have Vision, to have the answers and to be the leader.
Three pieces of good news about your leadership
It can be a frightening place to stand in the middle off, but there are three pieces of good news:
You got this far and you’re still standing, so you must be doing something right.
Your people actually want you to be the leader and they’re ready to forgive you just about any stuff up you’re going to make along the way.
Leadership is something you can learn, practice and get better at.
What is leadership then?
Leadership starts with this statement:
Your business is what it is today, because of WHO you ARE today.
That may seem obvious. But what may not be so obvious is what follows.
Because what it means is this:
If you want SOMETHING you’ve never had before,
First, you’ve got to BECOME SOMEONE you’ve never been before.
Systems and knowledge are never enough
Many business coaching companies sell a “system” that will supposedly deliver a business that generates a million dollars of profit every year. Those systems are often well thought through, well presented and well worth looking into, but they rarely work, at least not by themselves. The reason they don’t work is that Change, business Change or personal Change, is never about systems and knowledge. Just like we all know the system for losing weight (eat less, and exercise more), most of us business owners already know most of what we need to know to Change our businesses.
And just like losing weight means becoming the kind of person who commits to a regimen of eating less and exercising more, changing our businesses means having to become the kind of person who commits to a regimen of developing as people, as managers, as communicators, as coaches… As leaders in other words.
We have to become leaders, the kind of people, who do what needs to be done, to build the kind of businesses that make a million dollars net profit (or substitute whatever figure is relevant for you).
Becoming that kind of business owner, that kind of leader, who builds that kind of business, doesn’t happen overnight. You can’t flick a switch and suddenly become that person. Change is a Journey, an adventure, a process of growth. It takes time and commitment, and nobody can know, on forehand, what your adventure is going to look like or what the outcome of your Journey is going to be. Every business owner has his or her own Journey to make, and every Journey is different.
The one thing we can be sure of is this:
Change won’t happen unless you get on the Journey.
Getting on the Journey means stepping out of your comfort-zone and then staying there. You have to push off from the shore, get out onto the ocean, set a course for the horizon and not come back, because Change never happens in the safety of the harbour.
And you know this already. Take a look back over your life to date: It’s all been a Journey. Ten years ago you couldn’t have done what you do today.
But sometimes we just get stuck for a while in the safety of the harbour. Stepping out of your comfort-zone, leaving the harbour, is hard. The day-to-day of scrubbing the decks, repairing the sails and polishing the brass work gets in the way. And before you know it, the day-to-day is all there is.
The two questions you need to answer
That leads to two questions:
How do you know you’re ready to get on the Journey?
How do you get on that Journey?
The first question is the easiest as well as the hardest to answer:
You’re ready when you feel you’re ready.
More about the connection between personal and Business Change:
Do take a few minutes to watch this gorgeous TED talk by David Whyte, on past and future and journeys of Change.
There’s nothing wrong with being in the harbour for a while. We need to make sure the ship is seaworthy and safe, we need to make sure we know how to sail the ship, we need to learn to navigate and we need to get clear about the compass course we’re going to set once we get under way. The harbour is a great place to do all those things. But there comes a moment when the pull of the wide open ocean becomes irresistible. That’s when it’s time to go. And when you do: Set the course, hoist the sails, put your gaze on the horizon, and don’t look back.
How do you get on the Journey?
And the second question: How do you get on that Journey?
There are many ways to strike out, but one way to get onto such a Journey of discovery, is with me. I take my clients on inspiring journeys like that all the time. You could think of me like the captain of the ship. I know how to keep the ship safe, I know how to navigate, how not to hit the reefs and how to get safely back into harbour at the other end.
And I’d love to come on your next adventure with you.
Once you’ve decided that it’s time to push off and get under way, the process I will take you through is this:
We’ll get very clear about the state of your business and life as it is at the moment. What are the strengths of the business? What are your strengths as the business owner? Where are the stresses in your life? What are the areas in the business that are falling behind? What are the areas you need to develop in as leader?
We take several small steps first. You’ll get to put your toe in the water, feel what it’s like working with me. It’s called the Five Steps to Discovery Process, and it’s mostly free.
We’ll get equally clear about what we want the other end of the Journey to look like. In 6 – 9 – 12 months what do you want your business and your life to look like, in great detail? We’ll develop an enormous set of Goals and picture of the desired future. The Goals will include tangibles, and intangibles. It will include financial targets, and KPI’s across all areas of the business and your life. It will include your state of mind and your health and wellbeing, and everything else that you need to explore and discover to build the business and the life you dream off.
We’ll develop a strategic plan for the achievement of the Goal, with a wide range of monthly milestones.
We’ll shake hands and commit to the Journey, get on board, set the compass course for The Goal, push off, and not come back.
Ultimately, making the decision to Change, to get on the Journey, is Fun. It may not always appear that way, when looking out onto the vastness of the ocean at first, but it will be the most satisfying decision you’ve taken in a long time… I promise you.
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.”
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”
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.”
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.