How to Pay Yourself as a Business Owner
Let’s talk about the entrepreneurial elephant in the room . . . money.
Money is the foundation of your business. Without enough money, you can’t get your message, your products, or your services out into the world, and you become a slave to your business.
You started your business because you want to be free, not work for free, right?
I’m sure you’ve heard all the scary statistics that most businesses don’t make it to year five due to unhealthy finances — but we’re not going to talk about that today.
Instead, we’re going to talk about how to avoid becoming part of that statistic and how to make your business permanently profitable, starting with your very next deposit. Oh, and you're going to be able to pay yourself in the process.
Yep. You ready? Let’s dive in.
When I first started my business, I preferred to keep my head in the sand when it came to finances. I opened a business checking account, but that was about it.
I used my personal credit cards to fund some business expenses and would draw money from the business checking account willy-nilly, never really having a plan.
This was short lived, thank goodness. And I owe the financial smarts I now have to the book Profit First. I highly recommend you grab a copy.
After reading Profit First, I became excited about my finances. This book taught me that you can look at money in a positive light. I was able to flip the script in my head and look at how much my accounts were growing rather than shrinking.
Profit First teaches you just that — to put profit and paying yourself first, before expenses. You still pay your bills, but this method forces you to prioritize profit over expenses.
Let me explain in more detail
If you manage your money like most entrepreneurs, you use the following formula:
Sales - Expenses = Profit
Simple, right?
But is there any money left to pay yourself? What about taxes? Neither of those, very important, categories are accounted for.
The Profit First method has you divide all of your income into more specific categories that allow you to save money for taxes and pay yourself.
So, you’ll put a certain percentage of your revenue into the following categories:
Profit
Taxes
Expenses
Owner’s/Employee Comp
The book suggests you open a separate bank account for each category.
I personally have 5 different bank accounts for Copper Bottom.
I don’t follow the Profit First method exactly — I’ve adapted it to fit my needs. And that is the beauty of a system like this: You can make it work for you.
Here’s a breakdown of my accounts and distribution percentages:
01 | Main Checking Account
This is the catch-all account where all of my revenue gets deposited into. Whether it’s payments from invoices I’ve sent to clients, or those received through PayPal or Stripe, all revenue ends up here.
When I distribute my money into the various accounts detailed below, this account retains 10% to pay expenses. I run a very tight ship over here and like to keep my expenses as low as possible.
02 | Profit Savings Account
I distribute 10% of all income into this account.
I wasn’t always able to put this much money into the profit category. It has taken me some time to work up to this. Profit First helped me reach this goal!
Pro Tip: Open a savings account with a high interest rate and watch your money grow! I happen to love Capital One, so all of my savings accounts are with them. A Capital One Performance Savings account yields 4.35% annual interest — one of the highest rates I’ve found.
03 | Tax Savings Account
This account gets 20% of all income so I can keep good ole Uncle Sam happy.
This is another Capital One Performance Savings account at 4.35% interest.
04 | Employee Comp Savings Account
60% of all income gets distributed here. Employees, including myself, are my most valuable asset, so it makes sense that this is my highest expense category.
This is another Capital One Performance Savings account at 4.35% interest.
05 | Payroll Checking Account
This is the account I pay myself, my contractors, and employees out of. Each month, a fixed amount is automatically transferred from the interest-bearing Employee Comp Savings account.
Since my business income can fluctuate per quarter, the 60% distribution into the Employee Comp Savings account is often more than my monthly payroll, so I have extra money on hand as a cushion in case we have an unusually low revenue quarter.
It may seem like a lot of accounts to manage, but I’ve found that this method allows me to more easily keep track of the financial health of my business. Plus, it forces me to prioritize distributing money to myself.
And by using the same bank for all of my accounts, I’m able to see everything in one snapshot on my online banking dashboard.
Do you see how this method is way smarter than using the Sales - Expenses = Profit formula?
From the very beginning you are allocating for profit and paying yourself (and the government) first.
Go grab a copy of Profit First. If your expenses are very high at the moment and you don’t think you have 10% to put away as profit, that’s OK. I didn’t in the beginning either. This book meets you where you are financially and will walk you through how to cut expenses and teach you how to get to a higher profit percentage over time. Same with paying yourself — you might not think you can afford to pay yourself, but after reading this book, you’ll see differently.
Have you been feeling inspired and ready to kick off the design process for your own custom planner?
I created a guide featuring 5 things your day planner MUST include . . . and it’s available now at the link below.