You went into business because you wanted to do what you love and you wanted to make a good living doing it.
Why then do so many small business owners, especially in the early years, not pay themselves enough?
Not writing yourself a proper pay cheque may seem like the right thing to do when cash flow is tight but it has some serious ramifications for you and your business:
- You start resenting the business and we know mindset is critical to success.
- Your personal partner no longer understands your business passion as financial support at home dwindles. Your personal support team starts to break down.
- You begin to add to personal debt by putting personal expenses on credit cards and carrying balances.
- You feel unrewarded and you stop having fun.
Although we may know how much we want to be paid, we seldom know how much we need to be paid. So, how do you decide how much you should be paid?
Most common and not very effective method is to wait till the end of the month and see how much money is left in the bank. This has a couple of definite drawbacks:
- No money in the bank when you get there so you get none.
- Not much money in the bank when you get there so you get not enough.
- Your cash flow forecast (from last week’s blog) tells you there’s money in the bank but it’s to pay bills; so someone isn’t going to get paid them or you.
Here is a more methodical and reliable approach to determine what your personal monthly expenses really are and to include yourself in the accounts payable listing.
Create your Personal Expenses spreadsheet as follows; don’t forget to include HST:
My Monthly Expenses:
Description |
Amount |
Mortgage/Rent |
1500.00 |
Utilities |
125.25 |
Groceries |
420.00 |
Clothing |
100.00 |
Entertainment |
150.00 |
Car |
375.75 |
Student Loan |
272.32 |
Gifts |
1.00 |
Insurance |
120.00 |
Fun Money |
200.00 |
Etc etc | |
Start a second spreadsheets as follows and again don’t forget to include HST:
My personal expenses this year that are not monthly:
Description |
Amount |
When?
|
Vacation |
2500.00 |
August |
Dentist |
275.00 |
October |
School Fees |
8000.00 |
September |
Car Service |
150.00 |
July |
Etc etc | ||
It’s a good idea to do this exercise with your personal partner and to get agreement on what expenses really are and who is responsible for which ones. Additionally, two minds focused on the exercise will probably uncover expenses you may forget. This is the Power of Synergy; one plus one equals three. By the way; you will be surprised by the total. Don’t panic … it is what it is and now you know!
If the result is daunting don’t return to paying you whatever is left over because things will never change. At the very least, establish a minimum weekly amount to pay yourself and start to do it.
We believe small business owners can have exceptional businesses paying them a good income but only if they plan for it.
Good thoughts for financial sanity.
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