As business owners, we may be so busy making sure the bills get paid and the product gets out the door that we may not be quite as proactive about our own compensation. To pay themselves, many new business owners take what’s left after employees and vendors have been paid, and that ends up being their paycheck.
I’d like to propose a whole new way: entrepreneurs should be paid three times
- for what they do
- for the risk they take
- for the business they’ve built.
If you’re not getting paid three times, here’s how it can work.
First: Your Services
Just like the employees and contractors we work with, we should get paid for the actual work we perform in our business. Most of us wear many hats in our business, and we should get paid for all those hats!
As your business grows, the tasks you initially performed will be delegated to employees. They would never go without a paycheck – you shouldn’t either.
The amount you pay yourself should be similar to the market rate you would have to pay someone if you hired someone else to do the jobs you are doing. As your company grows, you will be going up the management ladder and your salary should increase accordingly.
Here’s an aha for some new business owners just starting out: If you have cash flow problems paying yourself or others, then you might have one of two problems: The goods and services you sell may not be priced correctly, or the number of clients you have may need to increase so that you reach an acceptable volume in your business.
Second: Your Risk
After you’ve paid yourself for the jobs you are doing in your own company, there should be something left over: profit. As a business owner, you have earned that profit; it’s your reward for taking the risks that go with business ownership.
If there’s no profit left over, then there could be a number of problems. Some areas I frequently see:
- underestimating costs – especially overhead
- not looking closely at what you estimated vs. what actually happened
- lack of training – proper training can have big pay-offs; likewise lack of training can have costly consequences
- not streamlining workflow (sometimes being penny-wise and pound foolish)
- not taking the time to look at key reports
- not understanding financial reports
There are various financial professionals who can help you review the revenues and expenses in your business and see where things are not adding up.
So far, your paycheck and your profits get you paid twice as an entrepreneur, and that’s the way it should be. But there’s also a third way.
Third: Your Business
A third way to get paid is when you sell your business. Have you ever even considered how you would retire/leave your business? If it’s a family business, then you may simply continue to share in the profits without having to work. But if this business is not going to family members, do take the time to consider how you could benefit when you choose to stop working. There are many steps you can take throughout the years to boost your business valuation, and the more you can do that, the higher the proceeds will be from your business.
One of the factors that can increase all three forms of compensation is your ability to work with finances. Many business owners focus on the skill they have (i.e. building, landscaping, growing plants, selling, consulting, having a retail store, and more) and not so much on analyzing their business beyond the profit and loss statement. But building your financial skills by working with professionals can be a big help. Here are just a few examples:
- Helping you understand your various financial reports (there’s more than just the P &L)
- Creating reports to help you monitor cash flow and profitability (specific to your business)
- Price your goods and services accurately
- Identifying the types of customers most profitable for you
- Improve your cash flow
So if you’re not being paid what you’re worth, take a look at where you fall short and make plans to change that. Let us know if we can help you take steps to increase your paycheck!