I spent ten years working in a traditional employment structure, where I received a fixed amount of money in my bank account every month. This money was unambiguously mine, since tax is already removed in the UK, so all I had to do was allocate it to my various living costs, fun money and savings. The only levers I had over my money were to redistribute my costs, reduce my costs or increase my income.
Things are different now. My new business, which is entirely owned by me and yet is not me, generates its own revenues and has its own expenses. It has its own bank account and it needs to set aside a bunch of money to pay its own taxes. On top of that it also needs to pay me enough to live and hopefully enjoy my life.
It gets more complicated, though, because I now pay myself a mix of salary and dividends, because tax efficiency. The money my business gives me isn’t all mine; some of it belongs to Her Majesty’s Revenue & Customs, and I need to set that aside.
Adding one final level of complexity, my business revenue has been extremely volatile, so far at least. Most of it has come from the sale of an online course, which happened in two time-limited ‘launches’ since the beginning of April. One day in August my business bank account balance was £5k. A week later it was £30k. I can’t generate £25k a month yet, so that money has to support both my business and me for a while, possibly months.
All of this is different from how it was and my mindset around paying myself was something like “I’ll take some amount of money out of the business occasionally when I feel like I need it and put aside a bit for tax”.
This is not a good idea. Do not do this. This is a recipe for stress and general business mismanagement. I ended up not paying myself much, living more off my savings than I really needed to, and I had a general sense of scarcity and insecurity.
The most important factor in the health of my business is me. It will do best when I feel happy, healthy and secure, so the question I should be asking is — how can I get my business to make me feel happy, healthy and secure?
The answer to that is for my business to lavish me with a large and known amount of money on a regular basis. Instead of taking what money happens to be left in the business when I feel low on cash, which feels bad, I’ve decided to set myself, gasp, a fixed and rising monthly salary, which feels fantastic.
My job as the only Director and employee of the business is then to make sure my business is able to keep doing this forever. If I’ve designed the business properly, me getting paid a lot means I’m consistently delivering great outcomes for my customers and clients, that my business is growing, and that I’ve kept expenses low.
And, fundamentally, if I can’t make a good living from my business then I have a bad business. Not paying myself properly is just a way to hide from this truth, since it makes the business look better on paper, while making my life worse. Paying myself properly will improve the health of my business just as much as it will my own.
Today happens to be my new pay day, so I’m thrilled to pay myself a princely £3000. That will be increasing to £4000 per month from October and £5000 per month from January, so I know I need to orient my business activities around those numbers. Doing business just became fun!
If this method sounds vaguely familiar to some people, it’s because it comes from the book Profit First by Mike Michalowicz, which is great. I’m sold on the method and will be writing about it a lot more in future.
If you liked this, you might also like these:
I publish a newsletter called Thinking Out Loud, which chronicles my journey as an online maker of things, but it's also is where I talk about whatever I'm interested in at the time. There are 900 of us now, come play!