How to Pay Yourself as an Entrepreneur

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One of the most common questions I’ve been asked since making my transition from the Director of Finance and Human Resources to full time artist and business owner is, “How do you pay yourself?”.

If you’re an entrepreneur that’s asking the same thing, you’re in good company! This was definitely something I had to do some soul searching on. I mean, I have 10 years of finance experience but even I knew this was a particular code to crack. I no longer had a company paying me, I’m paying me, so how is that done and what does that even look like?

We’re taught in basic accounting that profit is whatever’s left over after expenses are paid, but there’s never enough left over to pay ourselves, right? In the world of owning your own biz, that formula is a little backwards so let’s rearrange a few things and consider yourself as one of those expenses that needs to get paid first.

Let’s Talk About: Money Mentality

Let's change the way we think about our profit as being 'whatever's left over at the end of the month' and start paying ourselves first. We can adopt the 'Profit First' mentality that simply states to pay yourself first before allocating the rest of the income to pay expenses.

Here's how this way of thinking looks different:

Traditional Accounting Says:

sales - expenses = profit

Entrepreneurs 'Profit First' Says:

sales - profit = expenses

It's a given that we'll spend as much money on expenses as we have available to spend on expenses, regardless of how that amount varies. This is simply Parkinson’s law: ‘The more we have of something, the more we consume.’ Plan to pay yourself FIRST then give each dollar a purpose after that.

Let’s Break Down ‘Profit First’:

Mike Michalowicz, the author of, "Profit First", uses toothpaste to explain this concept:

When we buy a new tube of toothpaste, we're more liberal when applying it to our toothbrush. Some may fall in the sink or down the drain, but we don't care, there's a whole tube of it!

However, when our tube of toothpaste is almost empty, we act differently when applying it to our toothbrush. We meticulously squeeze every last bit of paste from the tube and carefully apply it to the toothbrush, making sure not an drop is wasted in the sink or down the drain.

To put it bluntly, we’re more frugal.

Let's Look At Two Ways To Pay

Method 1 - Percentage Breakout of Sales

Create a standard percentage breakout that you’ll allocate to all income. So, once your business receives money, you know exactly how to organize that money. Take that Gross Revenue and apply those allocation percentages to: Profit (Your Pay), Taxes, Operating Expenses, and Extra for Business. Here’s an example:

Profit (Your Pay) = 50%

Taxes = 15%

Operating Expenses = 30%

Extra for Business = 5%

Method 2 - Monthly Amount

Review your personal finances to determine how much money your business needs to pay you on a monthly basis. This method analyzes your finances so you can dictate where you want your paycheck to go. You can work backwards from here to determine how much your business needs to bring in each month to get you paid. You can use three main groupings: Bills, Spending, Wants/Needs.

Method 3 - Blend the Two Methods?

I know I know, I said we’d talk about two methods, but in the guide that’s linked below, I talk in a little more detail about Method 1 and Method 2 AND offer up a reasonable last method that blends the two.

I mean, let's be honest, our cash flow changes from month to month. We calculate our personal financial needs but our sales may not reach that amount in certain months. Each business has its own cycle of ebbs and flows, so perhaps blending the two options is a good way to navigate those waters.

Basically, there's no right or wrong method here and I don’t have all the answers.

They key is knowing how much YOU need to get paid in order to determine how much money your BUSINESS needs to bring in. You're no longer guessing, you KNOW, and that's powerful information my friends.

That's how you start setting goals and strategizing how to generate revenue and grow your business.

Click Here to get the full guide with all the fine details.