Pay yourself! A tip for small business owners.


COVID-19 has given many individuals the opportunity to start a business or make use of what they are passionate about. Yes, it is not all bad because there are some crazy success stories during these trying times.


Many small businesses have closed down, however, many others have risen up from the ashes. Some are doing very well and others are somewhat struggling to see their way.


One thing that makes a lot of small business owners feel defeated and eventually give up is the fact that they do not see any financial gains or benefit for themselves while operating their businesses.


What you need to do and how it can help you go to bed feeling somewhat accomplished.


1) Pricing of goods and/or services.


In College or University and some high-schools you might have been taught about the 4P's if you took a business related course at some point. "Product, Promotion, Price and Place." All 4P's are equality important but Price is often one that is difficult to determine. Is it too high or is it too low.? Many small businesses set pricing based on what big businesses or other small businesses are charging. Others price very low to try and break into the market. We made that choice before. This is about paying yourself so how does price matter?


Price x Quantity is what gives a business revenue. Most small business owners set price based on the service or product and only take into account resources needed and the profit they want to make. One thing that is often missed by most small business owners is how much they want to pay themselves from the business. That is an expense that needs to be included to ensure that the remaining profits stay in the business for future growth and business continuity. At the end of the day, you are part of the labor for the business. If you were to hire and pay someone to do what you do, that would be taken into account as a payroll expense right? So, as a business owner including a percentage in the pricing to cover your labor and human capital can help you see some money in your personal bank account to help you with bills or save or enjoy some takeout after a long week or month. Using all the business profits for personal expenses and not taking any pay at all from the business both have their own psychological impacts and can lead to a business owner feeling less and less motivated over time.


2) Paying Yourself.

Here is a simple case. For example, James charges $100 for a shirt he prints and sells online. The material cost to print a shirt is $50. This means that 50% of the revenue goes into covering raw materials such as ink, the shirt, shapes etc. James is left with $50, which is 50% of the total revenue. Most small business owners take the $50 as profit and put that back in the business or use it as a salary for themselves. That may be the right move in the early stages of the business. Later on a business owner has to pay themselves to see some personal income from their time and labor at the same time having enough in the business for growth and expansion. James can then split the $50 or (50%) into $30 (60%) for the business and $20 (40%) for himself. This gives James the opportunity to see some return on all the investment and time he has dedicated to the business while keeping some profits in the business. So, assuming James sells 100 shirts, he will have paid himself $2000 which can go toward his personal expenses and other needs. This leaves the business with $3000 to purchase supplies, software, and to pay for other expenses that can help the business grow and expand.


There may be some cases that are more complicated than this. The moral of the story is that paying yourself can give you the motivation you need to keep pushing forward and growing the businesses. Instead of feeling like you always have to dip into the business account to cover bills and other personal expenses or having no money at all in the business at all times.


If you can, Pay Yourself! That is our tip for you.


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