How to Pay Yourself as a Business Owner

One of the most common business owner dilemmas I get asked about is “When and how much should I pay myself?” In those grind-it-out early days, personal income often loses out to funding growth. When I work with founders and business owners on scaling their businesses we often talk about how to manage the inconsistent cash flow and still maintain some level of personal financial stability for the business owner. From personal experience, I can attest that in challenging times, the most resilient founders are those who willingly trim their own salaries to keep the ship afloat. Reflecting on my own path with Blavity, I've made this tough choice three times, and without hesitation, I'd do it again should circumstances demand it.

But make no mistake - you deserve compensation for working round-the-clock on your startup. The key is balancing reasonable pay with prudent long-term reinvestment.

Here are 3 models with pros and cons to consider:

1. Owner's Draw: One option is owner’s draws, transferring profits whenever you need extra personal cash. But draws often create a tax headache. It can create a wonky paystub which can often make it difficult for you to eventually show consistent income for things like mortgage loans. Also, ad hoc transfers can enable bad habits.
2. Founder Salary: Instead, implement a founder salary on Day 1, even a small one. This sets the expectation that you work for the business, not as a volunteer! View your pay as any other operating cost. Sure, it impacts cash flow at first. But you’ll build resilience by living below your means so more can compound for big goals.
3. Performance Bonuses: Also utilize performance bonuses rewarding yourself upon hitting revenue milestones. Celebrate wins without developing a constant expectation of high pay. And no matter what - keep personal and business finances wholly separate. Hyperorganize expenses but never co-mingle funds.

Revisit your compensation plan each quarter as you evaluate profit streams. As revenue exceeds operating costs and growth goals, put aside a percentage for your salary. Over time you should be able to pay yourself well for all your hard work while also funding the business vision!

No matter what, be conservative with drawing early and keep business finances wholly separate. Do NOT co-mingle your funds. Revisit revenue streams quarterly and set a compensation plan tied to profit milestones so you know exactly what targets trigger pay.

Stay heads down on accelerating business progress first and foremost. Your time to reap the rewards will come - and you’ll savor them even more having strategically deferred gratification earlier on.

Founders, what lessons or priorities guided your own pay strategy? What year or month did you start formally compensating yourself?

Subscribe to my free newsletter for more advice for founders: https://worksmartprogram.ac-page.com/thejourneypodcast