(4 minute read)
One of the wisest things you can do as a small business owner is to prioritize paying yourself. There are profound benefits to doing so, both material and psychological. It may seem counterintuitive to prioritize paying yourself, especially in the early stages of a fragile business venture. Nevertheless, you should make it a habit and build that habit into your routine business operations just as soon as it is feasible to do so.
The obvious challenge is determining at what point it becomes feasible. There is not a one size fits all formula for making that determination, other than considering these two questions:
Is there a cash flow cushion from which you can pay yourself?; and
Are you in a position to adjust your spending?
If the answer to either of these questions is yes, then you should very seriously consider establishing a routine practice to pay yourself. Outlined below are some basic instructions for initiating the process, along with an inspiring list of extremely beneficial rewards if you can make it happen.
How To Prioritize Paying Yourself
Determine Your Essential Expenses
The first step in the process is to calculate your essential business expenses: those expenses which are fundamental to keeping your enterprise alive. However, the primary question to ask yourself is, if this expense were eliminated entirely, how would the business be impacted, could I survive without it? This exercise crystallizes which expenses are truly essential and which are not. You may actually discover that you are carrying expenses that are not essential, but are instead bells, whistles or luxury items. We highly recommend that you prioritize paying yourself over assuming costs for items which are only posing as essential expenses. Regardless, once you have determined which expenses are truly essential, calculate the dollar amount of those essential expenses and continue to make those your highest financial priority, for obvious reasons.
Rank Your Essential Expenses
Once you have calculated your essential business expenses, rank them in order of importance. For example, the copy machine lease may not rank as high on the scale as the rent payment, or your materials supplier. We are not suggesting that you skimp on the payment of essential business expenses which are lower on the priority scale. If they are essential, they are essential. The purpose of this exercise is to ascertain which expenses reign supreme and which expenses could be temporarily neglected, in the event of a bad month or an unanticipated emergency that cuts into your positive cash flow. That being said, if you do experience a bad month or an emergency, continue to prioritize payment of your essential expenses over self payment.
Factor In Your Debt Obligations
Next, factor in your debt. As a general principle, you should not prioritize paying yourself over servicing debt. However, this can be a challenging calculation, because not all debt is created equally. Some debt is soft and contains built-in flexibility, while other debt obligations are ironclad, with hard deadlines and little or no margin for error. The primary objective should be to continue to service your debt at a pace and scale that does not threaten the underlying financial security of your business, or compromise your capacity to meet it's cash flow obligations. If you can cover your essential expenses, service your debt in harmony with your debt obligations, and simultaneously pay yourself, you should seriously consider doing so. If your cash flow cushion changes, you can always recalculate at that time.
How Much Should You Pay Yourself?
Now comes the most difficult calculation of all, determining how much to pay yourself. We recommend that you begin with a small amount initially. Be realistic about what you can afford to set aside. Maybe it's a percentage of each dollar you take in as income; or a percentage of your positive cash flow; or a percentage of each dollar you take in after all of your essential expenses have been paid; or a percentage of each dollar you take in after all of your monthly expenses (both essential and non-essential) have been paid; or maybe it’s a specific dollar amount which does not vary, but falls comfortably within your cushion. This calculation will obviously be very personal to your individual circumstance and level of tolerance, not to mention a function of many different variables.
Commit To The Process
Regardless of the specific formula you adopt, the most important thing is to formally commit to the process. Taking the initial step of paying yourself will be empowering, even if the amount is miniscule. It's an excellent means of securing a much needed win. Don’t underestimate the immediate psychological benefits of doing so until you have actually experienced it.
Set Aside Self Payment Before It Spends Itself
Once you have determined that you have a cushion from which to pay yourself, that money should be set aside immediately, before any of the bills are paid. Otherwise, the temptation to spend it will eventually become too great. If you are a disciplined small business owner, your natural tendency will be to set aside as much of your income as possible to cover expenses. A word of caution is that all of your income will eventually find a way to spend itself each month unless you intervene. This is why you must consciously and deliberately set aside a portion of your income for self payment right out of the gate, if you really want it to happen.
The Rewards Of Paying Yourself
Evidence Your Business Is Profitable
Once the habit of self payment has been formed, you will immediately reap some very consequential rewards. First and foremost, the fact that you can pay yourself signifies that your business is profitable, which is an excellent sign. Paying yourself elevates the concept of financial health as a deliberate strategic priority. It establishes much needed, and often neglected, financial clarity.
Control Over Your Other Expenses
Paying yourself removes the temptation to overspend, which is often a subtle and stealth killer of small business momentum. At very least, you will be much less likely to spend on wasteful items. Self payment creates a nest egg cushion for emergencies and unanticipated expenses. One of the primary benefits is that it cultivates the mindset of saving. The savings mindset pays additional dividends by strengthening your control over the business finances. Taking control of your business finances contributes to peace of mind and alleviates stress and anxiety. Additionally, it establishes a built in mechanism for paying off debt and building a retirement fund. Paying yourself first, if properly executed, guarantees that your business is living within its means.
Meet Your Goals
On a personal level, paying yourself creates a structural framework to achieve your much larger financial goals. It also provides much needed motivation and inspiration during those intervals of burnout and drudgery that inevitably occur. Finally, it fosters critical business thinking and discipline.
A Ready Made System
If you have not yet prioritized paying yourself, or are not currently in a position to do so, we highly recommend that you do everything in your power to make it happen. Consequential rewards await you. If you need assistance in establishing a built in cash flow process or protocol for doing so, let TrueView help you make it happen. One of our core principles is creating a cash flow system that empowers small business owners, like you, to make their dreams a reality. We built our cash flow system with paying you first in mind.
