How much to pay yourself as an owner – DSP 66

This isn’t an easy question for any business to answer, and it depends a lot on your own personal situation. Graham and Ashkahn lay down their thoughts in this difficult topic and provide insight into how they handle it at Float On.

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Transcription of this episode… (in case you prefer reading)

Graham: And today’s question for you is … well, it starts with the saying, “I hope this is not a silly question,” which is usually the sign of a silly question, “determining your salary versus investing back into the business. When you first started, what were some of the challenges around this, especially with having multiple owners?”

So, how much do we pay ourselves and why, generically.

Ashkahn: That’s not an easy question to answer for any business I think.

Graham: Yeah.

Ashkahn: It’s not just the float centers. That’s just one of the tough business questions.

Graham: Yeah, and nor is there an actual right answer to that either. It depends on so many different factors, including just your personal situation right now, how much money you need, how much money the business needs, are you operating at profit versus a loss. Can the business even afford to pay you more if you wanted to take home more?

Ashkahn: There’s certainly a reality that trumps whatever your decision-making ideas are. You can base this on a lot of things and you’re like, “Oh, we’re out of money.”

Graham: Right.

Ashkahn: And none of things you thought matter anymore.

Graham: Even after setting our own wages and having those in place for a while, we’ve definitely had to go for months at a time without paying ourselves because we had to go through some big construction project and eventually pay ourselves and back pay, or sometimes not. There’s different situations where, as a business owner, you also, despite whatever you’ve decided before, may change your mind. Reinvestment back into the business, delayed pay, things like this can just through big wrenches into your plans.

Ashkahn: It probably depends on your place in your life too, right?

Graham: Sure, yeah.

Ashkahn: When we started Float On, it was like eating ramen and sleeping on coaches. Making very little money was pretty much the same exact lifestyle I had been living, so it wasn’t like I was all of sudden losing my house and my car and all these… I don’t know, I don’t have kids.

Graham: Yeah, and if you have a mortgage and a family and children, all of these might be a different personal answer.

Ashkahn: But, you also want to make sure you’re happy. If you are not paying yourself enough to make you not start to feel spiteful towards your own business, that’s just going to lead to things spiraling downward. And it’s not going to be good for the business and it’s not going to make you more money to eventually pay yourself more.

Graham: So, let’s talk about this from a couple of different directions of how people might go about actually setting their own wages.

Ashkahn: Yeah.

Graham: So, the first is I guess realizing that, especially in the first couple years, if you don’t have to pay yourself money, it’s better to not. Definitely your business is in the most fragile state right then, there’s a bunch of things that could possibly go wrong and make it so that you’re all of a sudden struggling as a business to get that money. So, if you just have it in your bank account, it hasn’t left to go to your personal bank account, that’s actually better. That’s not always possible, we were able to do that during our first year, but that’s the ideal.

Ashkahn: And it’s probably the best time, or the most useful time, to reinvest stuff. It’s the time that your business could probably use the reinvestment to boost itself up and do the things that you didn’t quite have when you first started going and all that sort of stuff. So, your money in your business is going to go quite a bit further in those first few years.

Graham: Yeah, absolutely.

So, again, that’s from the ideal perspective. When you do start paying yourself, whenever that is, day one, day 700, we went the route of actually just figuring out for us as owners what we’d need to essentially survive and not be struggling on a monthly basis. So, when we were starting up we weren’t really setting aside money for personal savings, we were just making sure that we weren’t slipping into debt was the idea.

So, for us, it was just between ourselves and with us in Float On, we have this sense of equality that was going between the owners. We were all pretty much working the same hours and so, once we had brainstormed and figured out a number, we found something that worked for all of us and that was just how much we all took home as a monthly wage.

Ashkahn: Yeah, my recommendation would be to assign yourself to be the bookkeeper and then nobody will know that you’re paying yourself more than everybody else. That’s been working for me really well.

Graham: Yup. You can look up some great advice on embezzlement online. Maybe we’ll do another episode on it sometime. So, that’s one way to do it is actually just figure out what you need to live, pay yourself that, and there’s not a lot of wiggle room there. So, then it becomes when do you pay yourself profits on top of that? To me, your float center should be a few years in, it should feel stable, and that’s when you can start thinking about taking dividends in addition to a salary or something like that.

Ashkahn: But yeah, there is something to be said about the fact that when you look at the money in the bank account for your business, you kind of make you decisions based off of that. So, there’s something to be said about giving yourself a little bit more money as things start to get better. Otherwise, it’s hard to get out of that loop when you keep seeing the money in the business bank account, you’re like, “Okay, great. Well, I can use this to do this and do that, and do that thing.”

And when you just pay yourself a little bit of that more, then you start just seeing the new money in the bank account and making your business decisions based off of that. And just mentally, it’s just hard to look at that number and not spend all of it on things when it’s your business. You see the money in there and you’re like, “Ah, man, it would be great if I had this thing.” At some point, you do want to switch the balance a little bit, otherwise, it’s a hard pattern to get out of.

Graham: And another way, so another approach to figuring out how much you should pay yourself, which is something else that we’ve done with other projects as well is figure out what you would need to pay someone to take on your role in the business. And that’s probably how much you should be paying yourself. And the thought behind that is, if you ever want to sell your business, if you ever want to get out of the business, so you’re just not running it yourself, then you’re going to need to hire someone or someones to take your place.

So, actually doing an inventory personally and figuring out what kind of time you’re spending on the business, how much you think that time would cost if you were to pay someone else to do it. Run the numbers, and then that might be a good amount to at least start working to pay yourself to take home. Again, because even if you get sick or take a vacation, maybe you need to find a manager to take your role that you were doing in the business. And that will make sure that your business always has that money available because it’s used to having it go out the doors and paying you.

Ashkahn: And we’ve never personally gone the route of actually dividends or setting a set amount we think the business have and then taking whatever the profit is above that as payment. That’s another route that people could do. In the eyes of the government, that’s often how you’re taxed anyway. So, there’s, I’m sure, a lot of businesses out there that are functioning like that. They know this is the set amount that their business needs once things have probably stabilized after a few years and then, if they have a good year, they’re just taking those profits themselves. And if they have a bad year, then they’re not making as much money. So, that’s not a route that we’ve necessarily gone down, but it is definitely an option out there.

Graham: Yeah, and again, there aren’t really any set answers to this at all. It’s like asking how much time should you work in your business.

Ashkahn: Yeah, there’s a really soft science to all of this.

Graham: Yeah, I feel like at some level, it comes down to your capacity for pain. Like how much can you just handle abuse and that affects how many hours you can work in your business and how much you pay yourself.

Ashkahn: So, yeah, that’s it.

Graham: Yeah, just take that abuse.

Ashkahn: Does that answer the question, or what?

Graham: Yeah, thanks for sending that in. And for any others out there who might have your own questions to lob our way, go to floattanksolutions.com/podcast.

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