Question: My business is finally starting to bring in some solid revenue. How do I determine how much/often to pay myself versus reinvesting money back into the business?
Question by: Pamela
Collect Something from Day One
"There's something incredibly satisfying about being able to pay yourself because you started your own business. Work it into your business plan — even if it's just five dollars to buy coffee each week. This also alleviates risk to a certain degree, as you will have profited even if the business fails for some reason."
"Forecast your business revenue, business expenses, and personal expenses. Determining these three variables will allow you to identify what percentage of your revenue will be allocated towards business and personal. Use these percentages to automatically deduct from each revenue check. You can start to adjust these percentage allocations once you build enough history to determine a trend. "
"Almost every entrepreneur — myself included —reinvests their money back into the business. The most successful entrepreneurs I know do not take salaries in the beginning because if their business is successful, the money will be there later on. Keep your focus on bringing in solid revenue and only worry about paying yourself to cover your minimal living costs: rent, car, business travel, etc."
Invest in Personal Fuel
"Businesses need money to run, but people run businesses, and we need to feel a sense of progress and reward. With that said, these rewards need not always be financial. You may find that a great form of payment is not a larger paycheck, but an additional day off or an excuse to have a lunch meeting with someone you've met through your business. Run financially lean, but emotionally rich. "
Follow the Formula
"A surefire way to get burnt out on business is to never see the "reward." So once your business starts making profits, take a percentage and hold it back for "reserves" or reinvestment until you have a solid cushion. For my first seven-figure business, we took fifty to seventy-five percent of profits the first year for reserves/reinvestment. Treat yourself to the "reward" and pay yourself. "
Ramen Noodles and Nothing More!
"Take only what you need from the business, and nothing more. Focus on growing revenue for the business without thinking about how it gets back into your personal bank account. This doesn't mean that you should reinvest every cent back into your business; what it means is that you shouldn't take money OUT of the business until necessary. This way, it's always in the business for reinvestment."
Work for Equity, Not Salary
"Pay yourself the least amount possible and put the rest in the business. The most financially attractive thing about being an entrepreneur is your equity. Your risk is going to be rewarded in equity, not salary. If your goal is just to earn a living, then pay yourself all the salary you want. But if your goal is to grow your business, that's where the cash needs to go. "
What's Your Opportunity Cost?
"What opportunities are you giving up by paying yourself? Only pay yourself as much as you think fair without ruining any opportunities that can be had if you paid yourself less. A lot depends on your business, the market environment and the speed at which you want to grow. I've enjoyed taking luxurious vacations with my profits, but no place on earth compares to gaining market share."
Greed Makes for Bad Business
"Unless you have major seed money, you should try to pay yourself only what you need to take care of your important personal expenses: rent, food, etc. for the first two years. Keeping expenses to a minimum will help the company build cash reserves and will insure longevity. Entrepreneurs who go for the quick cash grab are the ones who often have major cash flow problems as a result."
In Regards to What You're Worth
"You should be compensated with the same considerations you would use to pay any employee. Your pay should reflect some mix of value you provide to the business, the amount of work you perform and most importantly, what it would cost to hire someone to replace you. Reinvest the rest of the money in your business. Your real pay day will come in the form of equity."
Do the Math!
"The next question to ask is: "Is my business cash positive?" Sit down and crunch the numbers; consider marketing expenses, travel, trade shows, inventory projections and current debts. Take this number and your sales numbers and see what you have left. Pick a base salary and work back from here, invest back the rest into the business and give yourself bonuses each quarter."
"No matter how much you are making as a startup, continue to take only what is needed to pay all your bills. It might be good times right now, but don't forget how many bad times there were before you got to this point. The future is not guaranteed. "
Show Me the Money!
"Deciding how much to pay yourself versus reinvesting in your business is no algebraic equation. Sorry, but a single solution set does not exist. Instead, a healthy balance of business objectives (short and long), current business phase, risk tolerance, and more is required. Though no magic bullet exists, here's a golden rule: show yourself the money, but not too much. Moderation matters most."
Cash Flow is King
"If you know what's coming in and what's going out for the next several months, you can determine your salary and reinvestment based on the bigger picture of your business. It's good habit to try and pay yourself consistently. Then, if you don't think you'll have enough to cover that amount, you know you have to hustle and get your clients to pay up! "
Consider Industry Standards
"Review trade publications to familarize yourself with what standard compensation is in your industry based on your position and responsibilities relevant to the size of your business. Consult your accountant about the tax consequences of paying yourself absent a solid history of revenue. Paying yourself now only to use those same funds to reinvest in your business in six months is poor planning."
The Young Entrepreneur Council (YEC) is an invite-only nonprofit organization comprised of the world's most promising young entrepreneurs. The YEC leads #FixYoungAmerica, a solutions-based movement that aims to end youth unemployment and put young Americans back to work.