Salary, ROI or both?

If you’re like most entrepreneurs you simply live out the till.  When the till has more money in it you live a little better and when the till has nothing … well you get the picture.
As a business owner and budding entrepreneur it becomes a never ending roller coaster ride where your personal finances are as unpredictable and erratic as your business finances.  You mastered the art of financial gymnastics a long time ago but the fact that you’re fighting the fight on two fronts never makes it easier.
So let’s take a step back to before you even had your business.  At some stage I’m sure you once earned a salary.  You provided your employer with skills and expertise and for that you were remunerated at the end of the month.  You were paid by the company you worked for in accordance with the value you provided. 
If during that time you saved a portion of your salary, and put it in a bank, you expected some form of return.  The money you saved, your asset, was expected to return some money back to you, namely interest.
The same principle applies, or should apply, in your own business.  For the time and effort you put into managing and running the business you deserve to be paid a market related salary.  Depending on what you actually do this may or may not be quite a considerable sum of money.  The company, albeit yours, benefits by not having to pay other staff and therefore allows you to draw a salary.  For now let’s not focus on whether this is a drawing or an actual salary.  Your accountant or tax advisor would be better suited to structure this for you depending on the circumstances.
For most business owners, especially in the beginning, they literally work like slaves.  They put in longer hours than ever before and do literally everything there is to do.  Sadly though we know that 74% of small business owners (American stats) earn less in their own business than they could working for someone else.
Priority #1
So your first focus should ALWAYS be to get to paying yourself a MARKET RELATED salary.  This needs to happen as soon as humanly possible.  This should be budgeted for and be a regular expense item on your business’s  expenses.  You cannot work for free.  No matter how passionate you are about your business and no matter how much you enjoy the freedom and flexibility you cannot work for free.
Whilst being a business owner has many advantages it also comes with added pressure and a very different kind of stress.  It’s also supposed to be a vehicle that supports you and serves your dreams and aspirations for your life.  
It is therefore critical to ensure that you are valued for your inputs and that there is a feeling of mutual value exchanged.  You manage the business and there is a commensurate value exchange back to you.
Like it or not as humans we are wired around the WIIFM principle – What’s In It For Me.  If you don’t feel like you’re getting enough in return you will slowly build up resentment to your business.  It’s slow at first and often largely sub-conscious but it happens.  If you’re feeling burnt out and fed-up with your business first double check the level of your salary.  If it’s not what you’re worth you now have a major contributing factor to your current state of mind.  A major insight indeed.
Priority #2
Just as you wouldn’t give you hard earned savings to a bank and expect nothing in return; you can’t be ‘giving’ your business money and expecting nothing in return either.  You’d never make a fixed deposit at the bank and not expect any interest back from them.  In fact, with the advent of online or app based banking you’re probably checking your monthly interest, albeit small, a couple of times a month.
So why are you ‘giving’ your business money and expecting nothing in return?
I often hear things like, “Does it really matter?”, “It’s my business anyway” or “It’s all my money isn’t it”.  The reality though is you have two functions as a business owner.  One is an employee role in the work that you do and the other is a shareholder role as the owner of the company.  The former should provide a salary and the latter a return in the form of profits and / or dividends.  
If you don’t get both a salary AND a return you can just as well sell the business.  That way you can invest the proceeds and get a return for doing absolutely nothing.  Other people can manage your money and you simply just collect the fruits of their labour.  Skip the full spectrum of pressure and stress as a business owner and rather earn a market related salary working for someone else.
Now I realise there are often a number of factors at play and there are realities around tax, the type of business, the economy, the state of the job market and so forth but it’s the principle that’s key.  BOTH Salary and ROI are a must as a business owner especially where you still work IN the business.
If you don’t budget for BOTH Salary and ROI you invariably just get one.  You need money to live and as most of your expenses are monthly you tend to draw money from the business monthly as well.  Because a Return on Investment (profit / dividend) is not urgent, isn’t paid monthly and doesn’t really affect your personal survival it is normally the easiest to neglect and delay.  Fix this now.
To get started:

  1. Decide what your market related salary should be.  What are you worth to the company?
  2. Pick a date when your first new salary will be paid and stick to that date.
  3. Amend the budget and cashflow forecast accordingly and increase any sales targets, KPIs etc.
  4. Send me an email the day your business pays you what you’re worth and let me know how that feels
  5. Work out the correct Return on Investment for your business.  This may be based on what you paid for the business, what it’s currently worth, an industry benchmark, better than what an investment company can give you passively.  The specifics don’t matter for the beginning it’s more the habit.  It may be a percentage of turnover or even a Rand amount.
  6. You now have an annual profit target that again needs to be used for budgeting and cashflow purposes.  Again amend the sales targets, KPIs etc. in a commensurate way.
  7. Set up a separate profit business banking account and regularly move the profit out of the business’s operational account into the profit account.  The more you see the profit separately the more you’ll drive the necessary activities necessary to hit the full Return on Investment targeted number.
  8. Remember that business is like a game and it can be mastered.  Also games are supposed to be fun and remember to make sure you have that in loads.

Remember as a business owner you have two roles.  Make absolutely sure you’re remunerated for BOTH!
Harry Welby-Cooke is the Co-Master Franchisor in Southern Africa for ActionCOACH, the fastest growing and largest business coaching company globally. Harry and his partner Pieter Scholtz developed ActionCOACH across Southern Africa, which now boasts over 40 franchisees. He is also a certified, leading business and executive coach. He has successfully assisted countless business owners to significantly grow their profits and develop their entrepreneurial skills. www.actioncoach.co.za / 012 665 1015