Why can't I pay myself a healthy salary as a Business Owners? How can I Fix It?
Running a business is challenging, and one common issue many business owners face is not paying themselves a healthy salary. Here are some reasons why this happens and possible solutions to address the problem:
1. Reinvesting All Profits Back into the Business
Many business owners prioritize reinvesting profits back into the business to fuel growth, often at the expense of their own salary. While reinvestment is crucial, it's important to strike a balance. Allocate a portion of the profits for reinvestment and ensure you pay yourself a reasonable salary. Consider setting up a structured salary plan that adjusts as the business grows. Start small and increase over time. Creating the habit is more important than the amount. Create a longer-term goal for optimal pay and ideally this is 50% or less of the profits in the business.
2. Cash Flow Issues
Inconsistent cash flow can make it difficult for business owners to pay themselves regularly. Set revenue goals and calculated how much do you need to generate each month to not only cover your operating costs, but also to have profit left over.
Implement effective cash flow management strategies. This includes timely invoicing, following up on overdue payments, and maintaining a cash reserve. Using financial forecasting tools can also help predict cash flow and plan accordingly.
3. Undervaluing Their Own Work
Some business owners undervalue their contributions and hesitate to pay themselves. They think of their time as "free" even thought they are the most expensive asset to the company. It is important to match the price with the value you are delivering for the products or services you are selling. Make sure to do some market research to understand how much people are changing and for what to see how you compare to the competition.
Calculate an hourly rate or monthly pay amount for your time, so you get recognized for the value you bring to your business. As the business grows, adjust your compensation to reflect your contributions and the value you provide. When you don't prioritize your own pay, you become tired and resentful of your business. This doesn't allow creativity and motivation to keep going.
4. Lack of Financial Planning
Without a clear financial plan, it's easy to overlook personal compensation. Develop a business budget or financial plan that includes your salary as a fixed expense. Regularly review and adjust the plan to ensure it aligns with your business goals and financial health. Over time, you can include benefits and bonuses. Don’t forget to evaluate gross margins to understand if you are pricing correctly for the time and effort it takes to deliver your product or service. Depending on your business model, gross margins can be as low as 30-40% and as high as 70%. Gross margins are calculated by taking revenue subtracting cost of goods sold or cost of services, divided by revenue and it show give you a percentage.
5. Fear of Financial Instability
Often I see business owners forgo their own salary to ensure the business has enough funds. This is why build a financial cushion by setting aside a portion of profits each month is key. This will provide a safety net and reduce the fear of financial instability. If used responsible, you can also consider accessing or leveraging credit cards and lines of credit for your business but only if you have a debt pay off plan in place. Additionally, consider diversifying income streams to create a more stable financial foundation.
Paying yourself a healthy salary is essential for your well-being and the sustainability of your business. By addressing these common issues and implementing the suggested solutions, you can ensure that you are fairly compensated for your hard work and dedication.
For more insights and personalized financial advice, feel free to reach out to us at Wealth & Worth Within. We're here to help you achieve financial clarity and success.
Book a call with a CFO if you help creating your ideal financial plan.
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