The Right Way to Pay Yourself From Your Business

Really, you shouldn't take money out of your business for the first 3 years. Honestly, this is why so many businesses fail. You keep taking money out of your cash flow, not out of your profit, because you're not calculating it properly. You have to understand business money and your personal money are not the same money. If you want to take money out of your business, as you should— a business is there to make you money— you need to know what are your margins. So what is your profit? Are you breaking even as a business yet? You need to have financial discipline to make the business strong, then the business will be able to support you. Hi, I'm Dr. Nataliey Bitature, and today we're talking about how business owners should pay themselves, because this is a very messy area where most people get it wrong. It's tricky, I will give you that. It's very hard to separate money, but that's the most important part. You have to understand business money and your personal money are not the same money. Sometimes it's better if you can formalize and have separate bank accounts to keep yourself in check. But I understand, for the first few years of so many businesses, you just manage everything yourself with cash, with mobile money. Firstly, I think write everything down because you should at least have a full picture of how much money is coming in and how much money is going out and what you're spending it on, so that you can start to separate the expenses that are directly from the business and the ones that are your personal ones. Most business owners start using the cash. When your business is making money, you're like, I made sales today, I can buy these things for the house. Yeah, don't do that because it's a habit that you make. You kind of feel like, I'll stop this when the business is bigger, or I'll get formal accounts, I'll start paying taxes when I have employees and I have a proper shop, or I have an office. Yeah, it's very difficult once you've already started doing it. So you want to try and separate that money from the get-go because you're going to hamper your own business. This is why so many businesses fail. You keep taking money out of your cash flow, not out of your profit, because you're not calculating it properly. If you want to take money out of your business, as you should, A business is there to make you money. You need to know what are your margins. So what is your profit? So look at all the money you're making in the business every day, your sales. Then you remove all the expenses. Don't pay yourself before you've paid rent. Don't pay yourself before you paid your staff. Don't pay yourself before you've bought more stock, right? Those are like the expenses that you have to make sure you've handled before you even think of taking money. Look at the profit you've made. Yes, on every t-shirt you sell you're making 5,000 profit. Mentally you know that, but are you breaking even as a business yet? Or you're still paying so much rent and you need to sell 40 shirts a month instead of 10 shirts a month? So you need to know the numbers of your business and be very confident in how much money you're making and make sure you've covered all your expenses. What's left now in the money that's left, ideally it first goes back in the business, especially in the beginning. Because you need to grow your business. If you need to buy more stock, you need to upgrade the shop, you need to have more staff, you need to change locations, you need to order things in advance. Sometimes we're buying things from China, you have to pay for all the goods for 6 months before they even reach here. But if you're eating the money every day, you're never gonna pay that money. So you need to first see how can I get the business to a healthy point. Really, you shouldn't take money out of your business for the first 3 years. Honestly, you should be thinking of the business as an expense. It's draining your life, your time, your money, your energy, all your resources. But after 3 years, it will to put back and give you. It's very hard to do it faster than that because as much as you're making sales every month, your business is doing well, your business still needs things. It's like a child that's still growing. You can't start sending them to do errands when they haven't learned how to walk. You have to first make sure the business is in a healthy place, then you can start to take money out of the profit. So now if you have profit every month, you can start to give yourself a salary. I really like to say salary. Think of it that way. Business owners feel like this is all my money. I have all this inventory, I have all this petty cash, it's all mine. Yeah, Bambi, it's yours as an owner, but it's not yours to spend. Give yourself a salary so that you're not suffering. You feel you're benefiting from your business, but you're doing it within a reasonable amount so that you're not going 10 million this month, 200 this month, you know. You're taking random amounts out of your business. Ah, this month we made so much money, let me take more things and buy furniture at home. Don't do it that way. You want to buy furniture at home? Look at how much your business pays you in salary per month, and then you say in 3 months I'll buy all the furniture. Builds discipline. You really need discipline to run a business because if you're moving money in and out of the business, you're just hurting yourself. You're, you're shooting holes in your own plan. So it takes discipline, it takes habits, and if you want your business to last, to grow to 10 years, to grow to pay your kids' school fees, to pay your rent in your house, to look after everything in your life, you need to let it grow. You need to feed it and nurture it and let it grown to a point where it can support you. Don't quit your job before the business has reached that point. Don't remove your other sources of income because you do need income. I understand that it's hard to watch something grow and put in all this effort and you're not actually benefiting from it, but you have other benefits. You get to tell people you have a business. You get to meet a big network of your customers. You get to engage with your stakeholders. There are many other things your business is going to do for you, but don't take money out that way.— you need to be disciplined about it. Write everything down. Build good habits. Be strong about it. Some months you will suffer. You will be stressed out. But rather you are stressed than your business is stressed. Think of it that way because the more you take out of your business, the less likely it's going to survive. That it's gonna get to a point where it can now pay you well because now as your business grows you can increase your salary. It's up to you. Every year, every quarter you're like how did we do? How are we growing? If you're growing 30% per month, you can afford to increase your salary because you can see steadily, consistently, you're seeing the numbers, your sales are consistent, you're writing everything down, you're disciplined about how you're paying things, you don't owe money, you're not dodging your landlord. You know, you need to have financial discipline to make the business strong, then the business will be able to support you.