3 Key Reasons Business Owners Should Prioritize Their Compensation

In the bustling world of small businesses, one employee 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.

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 critic.? My job is to help them get to where they want to go.? If you want transformation, we need honesty, not flattery. We are focused on the future, not the past, so let’s get on with it.

2.????? Not 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. I take a monthly salary for my basic needs and quarterly distributions as cash piles up.

This is a practical, yet powerful step that yields immediate results.? Please stop taking the leftovers!

“Adopt a profit-first mentality”

I advocate for putting yourself on payroll and taking distributions on a monthly or quarterly basis. I consider this table stakes and non-negotiable.

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

3.?? Growth Eats Cash

Most business owners try to fund growth with 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 combing through all her expenses, establishing Gross Profit Margins and Net Profit Margins, and analyzing expenses as a percentage of revenue.

CONCLUSION-Consider a "Cash Coach"

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.?

Best regards,

Patrick

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About Patrick: As a veteran in financial coaching with over 30 years of corporate banking experience, my mission is to empower small business owners like you to become numbers confident, optimize cash flow, leverage debt, and pay yourself competitively.

Please follow for more insights and don’t forget to explore my Profit Accelerator Resources:

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

1.???? Profit Accelerator Program: Become proficient with your business numbers in just 30 days, unlocking hidden profits of $25K-$75K+ in your business over the next 3-12 months.

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Ready to elevate your financial strategy? Let’s connect and discuss how you can run a thriving business and pay yourself competitively.

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