I want to know how much should you really pay yourself as an entrepreneur when, like you, Tracey, has a three-year-old startup? How much should I get from what I’m making? How much should I pay myself?
The first thing that needs to be assessed is your profitability. Do you actually make money on the products or services that you sell? I can tell you that 80 to 85% of the entrepreneurs that I worked with when we started working together, they are losing money on most products or services. That’s where you’ve got to start.
My first step is I always encourage a deep dive on pricing. Let’s start with the basics. How much does it actually cost you to deliver this product or service? And make sure, um, if there’s an element of labor, whether it’s you or a team member, how much time does it take, and then how much does that cost? If there are materials, then we’ve got to tap on an appropriate percentage for overhead those things you’ve got to pay whether or not you make a sale like rent, like Internet, insurance. Then you ideally would have a profit margin.
I suggest starting from that bottom-up approach, figure out what you think are your ideal prices. Then you’ve got to compare it to the market. What will they pay? You might want to charge $100 for a beaded bracelet, whereas the market will only pay $2. So you’ve got to see where is that disconnect? I encourage entrepreneurs before they even open their doors to do a business plan and to figure out if this is going to work from a financial standpoint before you outlay any time, any money.
Most entrepreneurs are super keen to get going right away. They don’t want to take the time to do that, but it is so worth it. So if anybody’s contemplating a new business, who’s listening, please do that. It will save you so much headache in the long run, because if you find out that it’s not going to be profitable, you can pivot your idea, you can maybe target a different client base who will pay more for what you’re offering. It gives you all kinds of options again.
The way that you can get paid from your business, there are three basic ways you can be on a regular salary. You can take dividends, which is after profit, or if you’ve loaned money to the business, you can repay that shareholder loan, they all have different tax implications. The bottom line is if you’re not making money, there is no money for you to get paid. Realistically, to your point, Sean, in the first couple of years, unless you’ve really got a business plan, unless you’ve got that client really lined up and you’re able to start very strongly. You’re not going to be taking a significant amount of pay.
Thinking that you are, and potentially making commitments to your family, but the vacation is going to go on. Maybe the car you’re going to have the house you’re going to live in. I would refrain from making those kinds of promises because it does take money to start the business and then you do need to put money back into it to grow it. If you want to grow your team, if you want to grow your sales. We’ve talked about cash flow, but growth is really hungry. It needs cash to fuel it.
I almost think about it and I’m gonna date myself. But when I was a kid, we used to play Pac-Man. You would have Pacman coming and eating those little bubbles. The same thing with growth, it eats up cash. You can’t just take everything out and expect your business to grow. It just won’t work. Basic math. If you have sales of $10, your expenses are $11 you’re already at minus one. There’s no room for you to take out a lot of money for your salary or your pay.