This question has come up a lot (as it should) so it’s time we address it here. One of the goals of your business is to make money, but how do you go about using that money for your life? Here are a few questions to help you figure that out. Today, I’m speaking to sole proprietors and single-member LLCs, but if you’re not in that category and have questions on this, let me know.
What do you need? Think through the costs associated with your most basic needs (rent, food, fuel, utilities, etc.). Be realistic about this and don’t try to make some spartan budget if you know that’s not going to work for you. We’re just gathering information here so put down your best estimates.
What do you want? Go to the next level and think about what you envision and want for your life, usually you will have goals that are beyond your current situation and that’s great! How would that new reality change the numbers above (usually they will be bigger!)? Again put together your best guess of how much it would take to fund that goal or lifestyle. These answers will help inform your revenue targets or how much your business needs to make.
What can your business realistically support? According to the Profit First method, if you’re a new business or a business bringing in less than $250K/year, you would aim to pay yourself 50% of revenue (after materials and subcontractors) to start. That leaves the rest for operating expenses, taxes, etc. How does that number match up with what you need and want? If your business doesn’t currently have the margins to pay you what you need/want, here are your go-to solutions: increase sales and/or decrease expenses. Another option is to take on a part-time job to help keep you afloat for a bit – just make sure this doesn’t take you too much away from actually being able to GROW the business. I’ll be touching more on this soon when I share my book review of Profit First.
How do you record it? When you pay yourself, it’s not a payroll expense and will not show up on your Profit and Loss. Instead, it will show up on your balance sheet as a reduction in equity and cash.