3 Key Reasons Business Owners Should Prioritize Their Compensation

In the bustling world of small businesses, there's one employee who often finds themselves at the bottom of the paycheck pile: the owner. If you're nodding along, feeling like you're the last and least to get paid, know you're not alone. In fact, a staggering 51% of business owners will forego a paycheck for multiple months to manage cash flow, and nearly half of American business owners pay themselves less than $100,000 annually.

The challenge here is that net profit does not equal compensation.? When you consistently underpay yourself:

??Financial Stress Impacts Decision Making: The constant worry about money can cloud your judgment, making it harder to make sound business decisions.

??Unsustainable Business Model: ?By not paying yourself a competitive salary you’re not setting up a sustainable long-term business model.

??Payroll Panic: When it comes to paying your staff, you may find yourself scrambling and stressed, which is not conducive to a healthy work environment.

??Growing Yourself into Profit: Trying to grow your way out of debt by underpaying yourself can often lead to the opposite effect, leaving you feeling overworked and underpaid.

So why does this happen to so many small business owners? Let’s break down the top three reasons.

Breaking Down the Top 3 Reasons

1.???? Not Hiring Yourself

As a business owner, you're often the last and least to get paid because you treat yourself more like an owner than an employee. Ask yourself, "Would I work for me at my current compensation?" If the answer is no, it's time to make a change.

Would I work for me at my present compensation, based on my experience, effort, passion, and drive?

Every time I ask this question to my clients, there is a long pause, followed by a barely audible “no.”? I never ask these questions to embarrass anyone or cause shame.? I’m a coach, not a motivational speaker.? My job is to help them get to where they want to go.? Honesty, not flattery, is what causes transformation. We are focused on the future, not the past, so let’s get on with it.

2.????? Taking a Salary

Many business owners prefer to take distributions instead of a salary, perpetuating the problem. Adopt a profit-first mentality and put yourself on the payroll. Start small and increase as you go. Maybe it’s $1K-$3K per month.? In the beginning, discipline matters more than the amount.

This is one of those practical, yet powerful steps that yields immediate results.? Stop taking the leftovers.

Adopt a profit-first mentality and put yourself on payroll and take distributions as a monthly or quarterly bonus. I consider this table stakes and non-negotiable.

This will help you form better money management disciplines that will lead to improved cash flow. Strength is obtained through pain.? I know it hurts, but it’s worth it!?

3.?? Growth Eats Cash

Most business owners try to fund growth with their short-term cash, which depletes their resources, leaving them feeling overworked and underpaid. ?Growth is great, but you should not pay for it in place of your compensation.? There is a better way.

You stay on the hamster wheel of hustle and feel frustrated that everyone else in your business gets a paycheck but you.

Instead, consider long-term working capital options like bank loans or investors.?Financial leverage is your friend in a growing business.

Let’s Look at a Case Study:

Tina, a medical professional, has a great accountant, but she does not take a salary but compensates herself through distributions. She never knows how much to save for taxes and is shocked when her bill arrives. However, after working with a finance coach (me) and building out her financial forecast, she started taking a reasonable salary. This had several benefits, including accruing taxes through her paycheck and paying into Social Security Retirement.

But most importantly… taking a paycheck, is forcing Tina to dive deeper into the analytics of her business, especially payroll.? She is now in the process of combing through all her expenses, establishing Gross Profit Margins and Net Profit Margins, and analyzing expenses as a percentage of revenue.?

CONCLUSION

Fixing these problems requires you to face them head-on.??That's where a finance coach like me can help. You may have a bookkeeper doing your books and an accountant for your taxes, but to make significant changes in your business, a good plan and someone to hold you accountable is essential.? ______________________________________________________________________________________

Whenever you are ready, here are three ways I can help you:

Financial Dashboard for Making Profitable Decisions This 30-day 1:1 workshop helps you become numbers confident and conversationally competent around the numbers in your business.? ??

Business Plan Workshop If you are looking to obtain funding from a bank or investors, a well-written business plan and pitch are critical for success.?

Profit Accelerator This 90-day 1:1 intensive includes the above, with additional coaching and accountability to help you achieve a minimum of $75K profit lift over the next 12 months.

Remember business growth is a series of consistent small steps, not giant leaps. If your compensation is well below what you could earn in the open market, it’s time to have a conversation and see how you can run a great business AND pay yourself competitively.