At the beginning of your business, there isn't a sacrifice you won't make to help it survive and grow. They'll be plenty of long hours, missed family events, and often very little personal compensation because you need to reinvest every dollar you can into growing the business.
Hopefully, all of that sacrifice pays off in the form of a thriving business for years to come.
But for too many such entrepreneurs, their business becomes a trap--something that continues to suck their resources away rather than adding to their wealth.
At some point along that journey, you need to ask yourself an important question: at what point are you simply working for your business rather than having your business work for you?
A key lesson to remember is: Pay Yourself First.
Let me explain using a story of a CEO I worked with for several years.
This CEO had built and grown a very successful professional services business with about $20 million in annual revenue. But to get to that point, he had sacrificed his personal income to help build up a great team.
His loyalty to his team was legendary, as even when the business dipped, he wouldn't let any employees go--he made up the difference out of his own pay to keep those people around for when things turned around.
But the truth was that the company was over-staffed and they had misjudged their market. The reality was that they didn't need as many people as they had on the payroll to deliver a great service. He was running a jobs program; a kind of corporate charity.
Eventually, this CEO began to realize through comments made by his CEO peer group how much he was sacrificing. The truth was he could have made more money taking a job with someone else. So he set a reasonable profitability target for the business of 10%. When the business couldn't even hit that, he began to trim his staff for the financial health of the business to hit his target profits.
The point of this story is that when you're the owner of a business, you wear two hats: one as the CEO and the other as an investor in the business. And you should be fairly compensated for performing each of those roles.
With your CEO hat on, you need to remember to pay yourself what a CEO deserves. Yes, in the early days, you sacrificed to make ends meet. But once your company has established itself, it's time to pay yourself at least a baseline income. Otherwise, you can find yourself running a nice big company--but you're still not earning anything. You can find that out by going to a website like salary.com to find out what CEOs of similar companies make and then budget for that figure. If you think a potential buyer will be fooled by your lower compensation and pay you more for your business - you are wrong - they won't. So take the money off the table.
As an investor, you have put in significant time and effort into building up a valuable asset. But if your financial advisor told you that your investment in the stock market was returning 0%, you'd be unhappy, right? That's why you need to think about your business like the asset it is--not unlike how you'd approach a stock, bond, or piece of real estate.
A good rule of thumb is that whatever profit targets you set for the year--say between 5% and 10% or even 20% for a good business -- you should try and budget that half of that profit is reinvested in the business for expansion of accounts payable and capital purchases needed to grow. But the other half should go to dividends for it's primary investor: you.
(We will talk about capital-intensive businesses with heavy cash demands in a later article.)
So, if you're feeling trapped by your business and that it somehow isn't giving you the kinds of returns you deserve, think about the dynamics of how you can turn things around so that your business is working for you instead and - Pay Yourself First.