January 1, 2018
Pay yourself first:
How-to guide for business owners
BY MARK BRADLEY
Paying yourself. It’s one of, if not the, single biggest reason we all get up to go to work every day. It’s great to have a business that’s also your passion, but you can’t do what you love every day if you don’t get paid. So why do so many owners of contracting and other small businesses struggle with paying themselves?
It starts with starting the business, I’m sure. As you get your business off the ground, you continuously inject your own money to keep it running. In return, you use its money to pay bills, put food on your table, etc. And while that’s a necessary evil for most small companies getting off the ground, the problem is that, years later, many owners still run their business the same way — where they hope for a paycheque instead of count on one.
It’s vital the business pays you a fair wage. Why?
You should be the highest-paid employee in your company. Plain and simple. You shouldn’t hope there’s money left to cover your salary. You must count on it.
You take enough risks running a business — paying yourself shouldn’t be one of them.
For personal credit, it’s helpful to demonstrate a consistent wage history. Banks are much more wary of those with variable salaries.
WHAT IS THE BEST WAY TO PAY MYSELF?
How to best pay yourself depends on some factors that are too complicated to discuss here. But you should definitely consult with an accountant or financial professional to determine the best method to pay yourself wages out of the business. This is best left up to the experts. There are many generally accepted (and even exceptionally creative) ways to draw income with fewer tax implications than a standard salary. But again, that should be done in close consultation with an expert.There are still the all-important questions of what you’re worth, and how to recover it. That we can answer.
WHAT IS A BUSINESS OWNER WORTH?
Again, there are a variety of factors here. Do you have a day-to-day role in the business, or do you show up once a week and spend the rest your time playing golf? I don’t know too many of the latter in this profession, but it is a consideration.
Owners should be able to target 10 per cent of the company’s gross revenue as their salary. For instance, if your company does $600,000 in revenue, the business should be able to pay the owner a $60,000 annual salary or wage. If you are in a partnership, that does not mean 10 per cent each. Partnerships, given two parties with vested interest in the business, should be able to do twice the revenue. The target for the ownership group (if there are multiple parties) is 10 per cent.
Once a business starts selling over $1 million (especially around $1.5 million) that 10 per cent rule starts to drop off a bit. As the business grows in size, you will need to surround yourself with smart, capable (and somewhat expensive) people. And you will likely use some of your raise to pay those people. But once you’re making $150,000 per year, you have some flexibility to do so. For instance, a $2 million business might pay the owner 8.5 per cent. That’s still a $170,000 salary, and it frees up $30,000 to help you surround yourself with good, motivated people.
Is that all? What about profit? No, that’s not all, and yes — profit can and will be used to reward you for the success of the business. Your salary is what pays you to do the work of running the business. Profit is a reward for a job well done. Think of profit like a bonus.
Profit is used for a few important purposes:
- To give owners a return on their investment in the business — you have likely got your money, and untold hours, tied up in growing the business. Profit is what pays you back.
- To reward exceptional and key employees.
- To invest in growing the capacity of the business (equipment, technology, yard space, etc.).
- To help cash flow, additional materials, etc., required by expanding businesses.
HOW DO I KNOW MY COMPANY CAN COVER MY SALARY?
Planning for your wage is simple. Start by calculating what you’re worth to the business. You can estimate that number using the 10 per cent rule above. If your company is very small, or just getting off the ground, you can start with a fair hourly wage. You might decide the business should pay you $30 per hour for the time you put into it.
Next, plan for how the business is going to pay you. This is where a company budget is essential, motivating, empowering, and even stress-relieving.
If you spend time actively working on jobs in the field, you will budget two ways to pay yourself. The first comes from the time you spend in the field. Let’s use fictional owner “Doug” as an example.
Doug has got a new, but growing business with about $600,000 in sales. He’s often working on job sites, but also has his hands in sales, marketing, invoicing, hiring — and he’s fixing equipment on the weekends. He is paying himself out of the business, but he pays himself when the money is there … and doesn’t pay himself when it’s not. Doug wants to remedy this situation, and he should.
Doug starts by figuring he spends 1,250 hours per year physically on job sites running the jobs. He targets $30 per hour as a fair wage, and therefore plans on a $37,500 salary for his time in the field. But Doug also spends time estimating, selling, meeting clients, fixing everything that breaks — and he shouldn’t be doing any of that for free.
Looking at the 10 per cent rule, Doug figures he should be able to pay himself about $60,000 per year out of the business. If he is getting paid $37,500 for his time in the field, he needs to budget $22,500 in overhead salary to get him up to a total of $60,000 per year.
So when Doug estimates hours worked on jobs — and charges those hours to clients — that is how he recovers the ‘field work’ portion of this job. His budget is going to make sure his overhead salary gets recovered in his overhead markups. This way, there is no guessing or hoping; Doug has a plan and a formula to pay himself what he is worth.
WHAT IF MY BUSINESS CAN’T AFFORD IT?
It would be too easy to insist you should look elsewhere for a job! If your business can’t afford to pay you a fair wage, why would you put yourself through all the stress, risk and investment? You should go work for someone else who can pay you what you’re worth — and you will have less stress and risk!
But every business owner knows there are times when things are tight. Capital and cash are required, and your paycheque is the easiest one to skip. Just be sure these times are an exception, not a rule.
Again, having an operating budget and an estimating system is essential to ensuring you can (and do) pay yourself fairly. Your budget gives you the ability to play with scenarios before the end of the year — so you can forecast what will happen, instead of learning the hard way.
If your company forecasts show you can’t afford to pay yourself what you had hoped, the problem is not your salary — it’s your business. In most cases, you should
be charging more for the work you do. Or you need to grow your sales volume until it can afford to pay you a fair wage. If you have never built a budget before, use this winter to do so. Once you get started, you will wonder how anyone ever ran a business without one.
Mark Bradley is CEO of LMN, based in Ontario. If you have a suggested topic for this column, please send it to firstname.lastname@example.org.
Landscape Trades, January 2018
Landscape Trades, January 2018