Friday, March 2, 2012

Why You Need To Pay Yourself Starting Right Now

A lot of small business owners start their businesses by taking all of the money they earn and reinvesting it into equipment, marketing, branding, a new website, or some other business expense until they feel like they "have it all." The only problem is, for quite a few small business owners, they'll never feel like they "have it all"- there will always be new equipment, software updates, workshops, or the latest gizmo that money in the bank could be buying in exchange for another business tax write-off.

While it may be tempting to get the latest of everything for your business, "keeping up with the Jonese" can easily become a fast track to letting your business expense you out of having a paycheck and a living wage.

This is why it's so important to pay yourself a dedicated portion of every bit of revenue that walks in that door.


Now, in your starting years, that portion may realistically only be 20-30% while you need to build your business and make important investments, but it is important to start taking income from your business the minute you start taking money. You deposit a check into your business account and then cut yourself a portion of the revenue as income to your personal account. The reason is that you need to develop good financial business habits from the very beginning so that you don't find yourself overworked and underpaid picking up work at Starbucks just to make ends meet. Frankly, this is the biggest reason people go out of business in two years or less. They simply don't pay themselves enough to make a living and they let their own business run them into debt and out of a job that they can't collect unemployment for.

Ideally, you should aim to take home 50% of your revenue before taxes.

(Sole Proprietors) This forces you to run a lean business that makes decisions based on needs, rather than wants and whatever the latest trend happens to be. It forces you to be creative when solving problems rather than just throwing money at them. It also makes it very clear when you're using your personal income to purchase something for your business and vice versa, so that you can measure your financial success against whether or not you're making enough for everything you need or want.

If you're two or three years into your business and still haven't given yourself a paycheck. It's never too late to start. You can start with the next check that walks in the door. Yes, you'll need to make changes in how you handle money and solve problems, but they will be healthy changes that will allow you to continue doing what you love far longer than you'd be able to if you continued not to pay yourself.

If you wouldn't be an unpaid slave for someone else, why would you choose to enslave yourself?


Anne Ruthmann is a lifestyle & wedding photographer from Boston, MA. She spent 10 years practicing marketing & management in corporate and non-profit businesses before pursuing her passion for photography as an independent small business. She loves helping others find creative and smart solutions to business problems. Follow her on Twitter to see her daily adventures and thoughts.

2 comments:

  1. I agree entirely with this advice - I just wish that I could follow it! I always seem to reinvest what I earn, although not always to simply have the next best thing. I constantly make the mistake of thinking that I need to offer something new and different and by not doing so I am missing out on so much business. This though is not always the case!

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