Have you been reinvesting everything you make back into your business for a while now, and have decided it is finally time to start making a profit and start paying yourself?
In this article I will show you how to work out when you are ready to start taking a consistent wage from your business, even if you have unpredictable income. And how to decide what you can afford to pay yourself for the work and time you have poured into your business…
You might think that you can only start paying yourself a wage when you are making a large profit first. However, it actually works the other way around. You need to start consistently taking a wage from your business to be consistently profitable!
If you are making even a small amount of profit each month for six months, you can still pay yourself a consistent wage. Taking out that wage first means it’s not sitting in your business account tempting you to spend it on something ‘businessy’ that isn’t going to bring in a worth while return on investment.
You might have heard of the Profit First method by Mike Michalowicz before. If not, you can grab the core chapters of his book here for free:
As a quick summary, the Profit First method takes every sale you make and divides the money into four different bank accounts by percentage: Profit (10%), Owners Pay (50%), Tax (15%) and Operating Expenses (25%). Although I do find the tax account needs to be a higher percentage if you are registered for GST in Australia.
Due to the unpredictable nature of our income when running our own business, the above method still does not give us a consistent wage. You may not even be any where close to those percentages either, that’s ok. Work out how your business is currently performing by filling out an Instant Assessment Worksheet and tweak the percentages by 1 or 2% closer towards your goal each financial quarter.
Setting up a consistent wage
Take a little less than the average of your profit/drawings (or owners pay) over the last six months as your weekly wage. Save one month worth as a buffer first. Then transfer only that average amount out to your personal bank account as your wage. In your abundant months, the Owners Pay account builds up and in your leaner months it’s there ready and waiting to draw upon.
Let me give an example…
If over the last 6 months your business made sales that total $10,000 and had operating expenses of $5000 (50%), then you need to set aside $1500 for tax (15%), you would have a remaining amount of $3,500 available to draw.
In the first month
Choose a day of the week or fortnight which suits your business cashflow and timetable to add up all your sales sitting in your ‘Income’ account. Then take a small percentage (from 1% up to 10% of sales) and set it aside in a ‘Profit’ account. This is what you get to pay yourself on the first day of each financial quarter as a bonus. You get to use it to reward yourself for the time and effort you give to your business. If it has been a slower month the bonus is smaller, in your abundant months your bonus is bigger. In this example 5% of sales or $500 will be set aside for Profit over the six months.
Next, set aside your ‘Owners Pay’ of 30% into a separate account to accumulate. Because we are assuming the $10,000 is coming in inconsistently over the six months (eg Month 1: $1500, Month 2: 2000, Month 3: 1100, Month 4: 2500, Month 5: 1600, Month 6: 1300) we will need to ensure there is a buffer there to begin with. So after the first month of using the Profit First method, your ‘Owners Pay’ account will have $450. We will keep as much of this as possible in the Owners Pay account as the buffer for the first month.
The second month
You get to start drawing your wage. In this case, start with $100 each week. By the end of the second month, the buffer of $450 will have gone down to just $50 from wages but then filled back up by $600 which is 30% of this current month of sales. This leaves a remaining balance of $650 ready to draw for Month 3 which in this case is a lower than usual income month of only $1100. Bringing in a total of $330 with the 30% Owners Pay. This would not cover a whole month of wages, but since there is already a buffer to cover the short fall, there is no pressure or panic to make quick sales and you can stick to a strategic and more rewarding longer term marketing plan to suit.
Keep an eye on your average sales each month by tracking them on a regular basis. Adjust your wages, taxes and operating expenses up or down to suit your current situation each financial quarter. Don’t forget to pay yourself that bonus you set aside for each quarter as well.
Would you like to learn more about the advantages of implementing the Profit First method in your business? Sign up for a recording of my recent webinar: How to ACTUALLY implement the Profit First method here.