Business

What Your Salary Tells You About the Health of Your Business

Posted at August 20, 2013 | By : | Categories : Business | 2 Comments

Business Owner Salary

 

 

 

 

 

 

 

 

 

 

Are you indispensable to your business?  Do you have “jobs” in your company that you or someone like you must do each day/week/month?  We could talk about EMyth principles or scalability, but I’m not beating you up about that (yet).  Running a business where money comes in the door is no small feat and you should be proud of yourself, but to understand the health of your business you need more.  Here’s what you need to know:

 

1.   Revenue Alone is Less Than Useless

Warning:  There’s a fake number running around out there masquerading as hard data – revenue. Picture an ad for a high end Mercedes (I love me a good Benz) – shinny, chrome, fancy dashboard, dialed in.  There it sits in all its luxurious glory, but until you tell me about the engine I know nothing.  Do I know if I want to buy that car?  No sir.  The outside of the car the topline revenue number is awesome, but it’s only a starting place and tells you nothing except that you have a product or service people will pay for.

 

People will brag about their chrome, their revenue, all day long.  They’ll blog about it, they’ll use it as a selling tool, as in “I made multiple six figures from this launch”.  Even the leading entrepreneurial magazines trot the revenue number out as a measure of success in business magazines.  It can really do a number on your confidence.  As my 7-year-old Constance says, it can make you “feel like junk”.

 

What we all ignore when we’re counting numbers in decimal places, i.e., four, five, six, multiple seven figures, is that until we know what’s in the engine, we have no idea of the health of the business because we don’t know what it costs to bring in those decimal places.  Just like I Love Lucy taught us, if it takes $2 to make a jar of salad dressing you’re selling for $1, volume is not going to cover it.

 

So if revenue isn’t the measure, what is?

 

2.   Your salary tells you how successful your business is.

Remember how excited you were to take home your first dollar?  That’s really the one that should be framed, but I digress.

 

As someone right there in the trenches of your business, you are indispensable to your business.  You,or someone who fulfills your role, must be there.  As such, you are overhead to your own business and that’s fair.  So to know if you’re getting $2 for a $2 jar of salad dressing, you need to pay yourself a reasonable salary.

 

If your business is able to pay you what you’d have to pay to replace yourself, your business is at least breaking even.

 

Lots of business are rigging the numbers by not paying their most valuable employee, the founder & CEO, a reasonable salary.  They’re not counting as a cost a position that absolutely has to exist.  The founder & CEO sometimes prefers it that way, because it makes the business look more successful that it really is.  It makes the business looks like it’s making $100-$200k more a year than it really is.  They the founder takes that home in “profit” and feels good about himself, but it’s a Mercedes with a crummy engine.

 

Unfortunately, even if that’s a better scenario for tax purposes, the founder is fooling themselves into thinking they’ve built a successful business, but it’s $2 salad dressing for $1 all over again.

 

The health of your business is found in what you pay yourself – a salary reasonable for the position you fill.  [TWEET THIS] Once you’ve done that, you’ve covered all your overhead and what’s left over is true profit, it’s pure profit, it’s something to be incredibly proud of.

 

Announcement:

I’m knee deep in the process of developing a 4-week course titled “Untangling Money Spaghetti; Financial Mastery for Small Business Owners”.  If you think it might be something you’re interested in, shoot an email to cfo@emilychasesmith.com and we’ll send you information as we move toward launch in mid-September.

 

About Emily Chase Smith

I’m an experienced attorney and entrepreneur. With my background in bankruptcy, I’ve seen the end of the business lifecycle and use that knowledge as a lighthouse to help others avoid the rocks. I counsel with entrepreneurs to provide custom solutions to help you get back in the game. You can contact me at (949) 391-6063, Google+ Twitter emily@emilychasesmith.com

  • Stephen Lahey

    August 20, 2013 at 5:59 pm

    Great advice, Emily. For me, paying myself well is also about maxing out my SEP (and my daughter’s 529) contribution. I think that too many business owners forget that they may not be able to sell their business at the right time, for what they think it’s worth, etc.

    • Emily

      August 20, 2013 at 9:38 pm

      Good point Stephen. We need to be smart about how we bring our “salary” home. There may not be an extra large payday waiting at the end of the rainbow or it may take a lot longer to get there than we anticipate.

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