Fairness may or may not consciously be part of the equation in every instance, but it is there. We all want to be well compensated for our work.
Most of the advice out there will tell you to choose to pay yourself with either a salary or an owner’s draw, walk you through the tax implications, and send you off to talk with your accountant. This is great advice.
But it completely avoids the deeper question that needs to be answered.
“How to Pay Yourself Fairly as a Business Owner” Isn’t the First Question You Should Ask
You first need to ask what’s fair to or sustainable for your business. That might sound odd. But taking money from your business assumes it can support the regular cash outflows. And if it can’t, then there’s a bigger issue that needs to be resolved.
This means you need to know if your business can support you before you take anything out for yourself. And to calculate that, you need to look at things from another direction.
Can Your Business Afford to Pay You?
For your business to afford to pay you, it must be able to cover what your work is actually worth, at market rate. Most owners don’t consider this, so they settle for scraps or maybe nothing… sometimes for years.
Very, very few business owners consider how much labor they’re putting into their business, much less how valuable it is. Most believe they’re working to build their business so it can pay off sometime in the future.
The challenge with this is that unless you have a target, how will you know when you reach it?
How to Find Your Target
As you’ll see in the list below, finding your target is pretty easy, and you don’t need your accountant to do it.
- Write down everything you do in your business.
This is about more than your title. List out all of the fractional jobs you do. Include all of it. Sales, proposal writing, managing, building the widget, service calls, marketing, scheduling, bookkeeping, invoicing, taking out the trash, answering the phone, and on and on and on… - For each of your fractional jobs, find out what you’d have to pay someone else to do them.
These numbers should be the going market rate that a capable person would actually charge. - Add these numbers up.
The total for all of these jobs is your target. It’s what your business would owe you if you were a stranger (or a group of strangers) it had to hire to accomplish all that you do. This is what your work is worth today.
Now take this number and compare it to what you’re currently paying yourself. For most owners asking how to pay themselves fairly, there’s a significant difference between the two.
This difference is something your books can’t show you because it’s not how we usually look at our contribution to our businesses. We typically look at our to-do list and how many hours there are in a day and work as hard and as quickly as we can to get it all done, and hope there’s time at the end of the day to relax and spend time with our loved ones before collapsing into bed and getting up to do it again tomorrow.
This hamster wheel is why knowing your target is so important. Now you have a goal for the business to grow to so you can be paid fairly.
How Does This Help You Pay Yourself Fairly?
It gives you a number to grow toward and, most importantly, the focus to make the decisions necessary to get you there. The focus comes from knowing the amount the business can’t pay you yet.
There are two ways to address it. Either the business brings in more or the business spends less.
Cutting costs can only go so far. You can’t shrink your way to paying yourself well.
So past a certain point, you’ve got to increase your revenues. Paying yourself well as a business owner is a revenue problem.
When I work with business owners in this situation, we start employing my specific strategies to:
- Raise prices
- Identify and drop clients who pay the least and require the most
- Identify and pass on jobs that don’t provide enough upside
- Hand off the lowest value jobs so they can focus on things only they can do
- And, of course, cut costs
This is the work I do with owners. I’m in there with them. Advising and guiding them on which strategy to focus on next and holding them accountable to accomplishing the most necessary tasks to move the needle. Together we watch the difference between what the business can pay and what it should pay diminish. Then they can get paid appropriately for their efforts.
If after you run the numbers yourself, the discrepancy between what your business can pay you and what it should be paying you is larger than you expected, or you’ve not been able to eliminate the discrepancy yourself, this is usually a sign you need to pivot and stop trying to do it all on your own.
Ready to stop guessing and start moving the needle? Schedule a 15-minute call to see if you’re a candidate for the same process I’ve used with other business owners. The process includes no-cost and low-cost strategies that have dramatically increased their revenues.
About the Author
Karen Finn, PhD is an author and business growth strategist. Download a copy of her book, The Business Growth Plan, to get insight into the low-cost and no-cost strategies she uses with her clients to 2x-3x their revenues.
