As a small business owner, you're probably always looking for ways to keep your expenses low and increase your profits. But what about your own salary? How much should you be paying yourself?
Paying yourself is one of the biggest reasons you own your business, right?
Well, this makes me wonder . . .
Are you even paying yourself?
If you are paying yourself, are you paying yourself enough?
Is it healthy?
Is it too much?
Too little?
When we first start out, most small businesses don't really take any money out of the business. In fact, they often add money in to keep it going and to get it going. But taking a wage is really important. It's the reward for working in your business, right?
Would you expect to be paid if you were working for somebody else?
And those of you who have employees probably feel the responsibility to pay your employees.
So, how much should you pay yourself as a business owner without compromising the business and keeping you on the path to financial freedom?
How much should I pay myself as a business owner?
Business owners struggle to know how much and when to pay themselves. We know that.
I know quilt shop owners that have not paid themselves in over 40 years. I also know others who have paid themselves a little bit early on but have never given themselves a raise as they've grown their business.
While others have only taken out money when they personally desperately need it, every business needs to have a cash management system. I love the Profit First system because, following its core principles, you can grow your business and get paid doing it.
The Profit First system is the cash management system that I promote. The Profit First system is the cash envelope system, modernized and adapted for business. You open six foundational checking accounts to ensure you spend and save the right amounts at the right time in each stage of your business.
Here are the six foundational accounts for quilt shops:
income
inventory
profit owners
compensation
taxes
operating expenses
Income Account
So the income account is to collect all payments from your customers. This account acts as a serving tray to the other accounts based on customized percentages.
Inventory Account
The inventory account is straightforward and simple . . . to save and pay for inventory.
Profit Account
The profit account actually has three purposes. The first is to be an emergency fund for your business because it's not if an emergency comes, but when an emergency comes (because it will happen). The second purpose of the profit account is to destroy your debt or by saving and making extra debt payments each quarter. This will help you eliminate your debt very quickly. Thirdly, to pay you a quarterly bonus. This is your shareholder dividend that most large corporations pay out each quarter.
Owners Compensation Account
And then we have the owner's compensation account and that's the account we're focusing on today. This account is to accumulate and pay you, the owner of the quilt shop, a consistent paycheck, right?
Tax Account
The tax account is to pay the business's annual income taxes of the business and your quarterly estimated taxes, and personal taxes.
Operating Accounts
The operating accounts pay for everything else we haven't specifically discussed. So back to that age-old question . . . how much do I pay myself as the business owner with Profit First?
The answer to this question is . . . percentage based. It really depends on the stage of business that you're in and your level of revenue.
Paying Yourself as a Business Owner
What is the percentage you should pay yourself?
So for quilt shops that are just starting out. I'm referring to those that have less than $250,000 in gross profit, and they have a 50% gross margin. Your target wage percentage is 50% of gross profit, or you can think of it as 25% of total revenue. Be mindful that his example applies to those business owners with a $250,000 gross profit and a 50% gross profit margin.
If you have a different gross profit margin, your percentage will be different. And for this specific reason, I highly recommend that you reach out to me to help you get your customized owners composition and percentage. It's a really easy calculation to do.
So for quilt shops with higher revenue or different gross margin levels, the owner's compensation will be different.
And the other thing to note is that as you change your business and progress to the various stages of your business, your owner's compensation percentage will also change.
That's one of the reasons why I highly recommend that you work with me as the quilt shops accountant and Profit First professional or somebody with a similar experience to figure out your customized owners compensation percentage.
We know that we hurt ourselves and our business when we don't take a wage, or we try to take too much out of business, right? Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.
Using Profit First, we can answer the question how much should I pay myself as a business owner and then make a plan to achieve your target owners paying.