As a business owner, paying yourself first requires balancing personal financial needs with business cash flow requirements. Work out your basic living costs through personal budgeting, track how much you take from the business compared to market wages, and protect your income with appropriate insurance. Keep track of your “sweat equity” investment and plan to be rewarded as your business grows and becomes more profitable.
Key Takeaways
- Create multiple personal budgets for different business stages, from startup to sustainable operations
- Track the difference between what you take and a fair market wage as “sweat equity”
- Don’t put all your eggs in one basket by reinvesting everything back into the business
- Get insurance protection, especially income protection, as soon as possible
- Avoid “killing the golden goose” by taking too much money out too early
Why Most Business Owners Struggle to Pay Themselves
As a business owner, I am sure you have heard of the concept of paying yourself, however based on my experience of working with hundreds of business owners it’s a concept that many just don’t practice.
I believe there are a couple of reasons for this. Business owners feel compelled to put everything back into their business and they also do not track how much money they actually take out of the business.
Business owners that put all the money they can back into their business often believe that they will get a better return on investment than if they had it in other investments.
Why You Shouldn’t Put All Your Eggs in One Basket
We have all heard the saying that you shouldn’t have all your eggs in one basket. Well this is true for business. There are a large number of factors, many of which are outside your control, that can have a serious impact on your business and even possibly put you out of business. If you have re-invested everything you had back into your business and it doesn’t work out, you may then be left with nothing.
This is where our one-on-one coaching approach helps business owners create sustainable financial strategies that protect both their business and personal wealth.
How Much Should You Pay Yourself at Different Business Stages?
When looking at paying yourself first, it will often depend on what stage your business is at. The reality is that you are going to need some money to live off. Now this money may be coming out of savings, however at some stage you are going to need to be able to take some money out of the business.
Create Multiple Personal Budgets
You want to know that your basic living costs are going to be met. Yes, you need to do a personal budget and make sure that you are going to have enough money to cover your basic living expenses. Now there is nothing wrong in having two or three budgets.
- Budget One might be when you are starting your business and can afford to take very little out of the business
- Budget Two would be when your business is now sustainable and you are able to afford to take a little more out of the business
- Budget Three is when you are enjoying the lifestyle that every courageous entrepreneur deserves
WARNING: I have seen many businesses suffer and fail because the owners have “killed the golden goose” by taking too much money out of the business.
What Insurance Do You Need to Protect Your Income?
As soon as you can and ideally from the start, you should have insurance. There are a number of different types of insurance and often you will have to make some hard decisions if you can’t afford all of them. A great rule of thumb is taking out insurance for what you can’t afford to lose.
Something which is often overlooked by business owners is income protection insurance. Think about what would happen to your business and your personal life if you were not able to work and generate an income?
The Australian Tax Office allows tax deductions for income protection insurance premiums for business owners, making this protection more affordable.
How to Track Your Sweat Equity Investment
Keep track of how much you pay yourself compared to what would be considered a fair market wage. Having started a number of business myself, I am very familiar with the concept of “Bootstrapping” a business. In other words, not being able to take a fair market wage out of the business.
Having done this, I can strongly recommend that you keep track of the amount of money you take out of the business and how much you should be taking as a market related wage. This difference is what we call “sweat equity” , it is your investment into your business.
You are an investor in your business and all good investors expect a return on their investment. Over time as your business grows and becomes more profitable you will be able to take more money out of your business than a market related wage. You will feel even better knowing that you are being rewarded for your earlier efforts where you didn’t take a market related wage.
Through our Ultimate Tradie Business Transformation programme, we help business owners create systems to track both their financial contributions and returns effectively.
Planning for Different Business Lifecycle Stages
Remember it is going to cost you something to live, you want to know what this is and track the amount of money you take out of your business. As you build your business it will go through various stages including start up, expansion, maturity and sometimes it might even be in decline. Depending on the stage of your business will depend on how much you can or should pay yourself.
By having both a personal and business budget you will be able to make better informed decisions, diversify your risk and have a backup plan.
Frequently Asked Questions
How much should I pay myself when starting a business?
Start with your absolute minimum living expenses covered by Budget One. Track the difference between this amount and a fair market wage as your sweat equity investment in the business.
What’s the biggest mistake business owners make when paying themselves?
Taking too much money out too early and “killing the golden goose.” This can seriously damage cash flow and put the business at risk of failure.
Should I reinvest everything back into my business for better returns?
No, don’t put all your eggs in one basket. Many factors outside your control can impact your business. Diversify your investments to protect yourself if the business doesn’t work out.
What type of insurance should I prioritise as a business owner?
Income protection insurance is often overlooked but crucial. Consider what would happen to your business and personal life if you couldn’t work and generate income.
How do I track my sweat equity in the business?
Keep records of what you actually take from the business versus what you should be earning as a fair market wage. The difference is your sweat equity investment, and you deserve returns on this investment as the business grows.
Getting your personal and business finances balanced takes planning and discipline. If you’re ready to create a sustainable approach to paying yourself while building a strong business, let’s discuss your specific situation and develop a strategy that works for your stage of business.