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Were you the first person you thought about? If not, why not? Do you treat yourself this way when it comes to paying yourself? Or if money is short, are you the last to get paid…again. You may think that it is okay to not pay yourself a salary and just live off the profits, if and when there are any. This isn’t a good practice. You need to pay yourself a salary on a regular basis, just like the star employee that you are. You wouldn’t expect your other employees to go without a check until the end. So why is this an okay practice for you?
So what is wrong with not paying yourself a salary?
1. You are distorting your earnings. If you own a business you are serving two distinct and separate roles. You are both an employee and an owner. You should pay yourself a salary for what you do and pay yourself profits for what you own. If you are mixing these together, you get a distorted view of your financial situation. If you don’t pay yourself a wage, you are inflating your income. You can’t make the decisions that you need to make to get to an appropriate level of profitability with your business because everything is distorted.
2. You won’t have the proper information to know when you should hire someone else to do some or all of the jobs that you are doing. You should be always evaluating the best use of your time and looking for ways to apply leverage. Meaning, can you off load some of the lower level tasks that you are performing to someone else at a lower pay scale and free yourself up to do more important activities, like sales. If you aren’t paying yourself, hiring someone will feel like adding to the payroll. You will hesitate to do it even when it makes sense. You will effectively be slowing down your business growth. Pay yourself based on the jobs that you are actually performing. Raise your salary as you raise the value you are adding to your business. Use leverage by paying other people to perform lower value tasks. You should be performing the tasks with the highest value.
3. It doesn’t put off to the future something that needs to happen today. It is easy to convince yourself that profitability is something that will happen in the future. After a few more big sales or some other type event. But profitability needs to be an ongoing process. Not a one time big event that you hope will happen down the road somewhere. If you are paying yourself a salary on a monthly basis, you will be more aware of the actual cost of running the business and what margins are really necessary to make your business model work.
4. It keeps you (or your family) from being pissed at the business. I have had first hand experience in working for a business that couldn’t afford to pay me. It was all going to work out somehow in the future…….except it didn’t. And every month that I was putting in effort and not getting paid, I got more and more angry. It is inevitable. At some point you will ask yourself “What is the point? Why am I putting in all this effort and not getting paid?” It gets even more complicated if you have other owners. Is everyone putting in the same amount of effort? You can start resenting things pretty quickly. And I assure you that if you are feeling this way, your family probably is too. Bootstrapping is fine and I highly recommend this. But there needs to be a path to you drawing a salary for all the work that you are putting in and the sooner the better.
5. If you ever want to sell the business, good prospective buyers will see red flags if you are working in the business and not getting paid. You may think it is better to show more profit. It isn’t. Savvy buyers will recognize that the numbers contain at least one lie (net income) if you aren’t drawing a wage. Then they will have to look at things a lot more critically to determine where else you have been lying to yourself and what other numbers are distorted.
Good decisions can’t be based on distorted numbers. Getting your salary right is the first step in having reliable numbers to evaluate your business performance.
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