Profit and paycheck are not the same thing. As small business owners, how do we pay ourselves? Should we set ourselves up as employees? What about taking owner draws when we need money? Often, it's difficult to set up an organized and structured paycheck for ourselves. The problem is this disorganization can stick with us down the road. Years later, we're still just taking money from the business whenever we need it. This does not provide us with any variety of budget. If we continue doing this, taking owner draws whenever we need it, we're screwing both ourselves and the business.
Firstly, if we're doing this, we don't have the ability to set up a budget for ourselves, personally.
Secondly, we don't have the ability to set up a budget for our businesses.
Thirdly, and perhaps, the biggest issue here, is that we confuse this concept of paycheck and profit distributions.
Let's review
Our paychecks are the payments we make to ourselves for the work that we do in the business. I'm assuming as a small business owner; you probably are working inside the business, right? You deserve to get a paycheck for that! you wouldn't show up to work anywhere else without getting a paycheck, would you?
Profit Distribution
Our profit distributions are the rewards we get for the investments we've made into our businesses. Keep in mind, we have multiple things invested in our small business. two major assets have been invested. First is money. Second, is time and energy. I usually talk about these as separate assets, but today, we're going to talk about them the same. We invest our time, our energy and our money into the business. We deserve to get some variety of reward.
This is where profit distributions come in.
Profit distribution should be paid out once a month or once a quarter. In some cases, a once-a-year payout can be the most effective. Regardless, these funds should be getting set aside regularly. I'm a huge proponent of Mike Michalowicz's Profit First concept. The book instructs us to open a bank account, put profit distribution funds aside, and not to touch them until it is time for them to be distributed. Once it's time for profit distribution, we can take that money and distribute it back to ourselves. If we are getting a paycheck and profit distributions, we're going to be making a decent chunk of money from your business.
Financial Literacy
We must also consider the need to make our businesses financially sound and fiscally responsible. The business must be able to issue your paycheck while still turning a profit. It forces a level of legitimacy into everything we do for our businesses. Clearly, we would not invest our assets and resources without getting a financial return. A notable example is stocks. If a person buys stocks in the stock market, they are investing in ownership of someone else's company. If those stocks are not increasing and producing dividends, one would take that money and invest it somewhere. Financial literacy is a necessity for all small business owners.
No “one size fits all”
We deserve to be taking a paycheck and profit distributions, but we cannot get there overnight. Mike Michalowicz's book “Profit First” is an invaluable resource. I highly recommend everyone check that book out and start applying its principles in your business. Obviously, there is no “one size fits all” approach. I, personally, took a slightly different path. I didn't start with all the bank accounts Michalowicz suggests. I started with one Excel spreadsheet (which he actually advises against. Sorry Mike!) I, then, added another bank account, and from there, I added more and more because it got easier. The more bank accounts I had, the easier it was to organize my company funds. But the idea of starting with all the bank accounts he suggested overwhelmed me, so I started where I could.
The Proof
Budgeting my life has become easier since I now get a paycheck and regular profit distributions. It makes planning for the business and profit generation easier in turn.
I fight harder to protect profit distributions for me and my team. We generate more profits as a result, and my business is more stable and powerful. Not to mention, I now have the ability to budget my life. I am a lot happier getting a profit distribution every quarter than I was when I just barely got a paycheck. I was receiving a paycheck at the time, but I was not receiving enough to cover my expenses. I was forced to use whatever money I needed to pay my bills to survive. When I say that my initial strategy has failed, I am speaking from experience. When you separate your profit and your paycheck, you and your business have the opportunity to thrive.