Your Business Should Pay You—Here’s How

I thought I'd start today's episode with a listener question. We got this one into the show this week and I thought, this is a perfect way to talk about what I want to talk about today.And this is what they said. They said, Ralph, I'm working 60 hours a week, but somehow there's never enough left to pay myself.Everyone else is getting paid, my employees, my vendors, even taxes. But I'm always last. How do I fix this without wrecking cash flow? Well, guess what? If your business doesn't pay you, it's running.You gotta flip that today because your business should reward your work, not drain your wallet. That's exactly what I'm going to cover on today's show.

Running a business isn't easy. It's long hours, tough calls and relentless pressure. No shortcuts, no handouts. Just grit, grind and the will to keep going when most would quit.Welcome to Grit and Growth Business, the show for entrepreneurs who know success is built the hard way.Hosted by Ralph Estepp Jr. A seasoned business coach, accountant and fellow fighter in the trenches, each episode brings you real talk, proven strategies, and the unfiltered truth about what it really takes to build something that lasts. Because if you've got persistence, perseverance and determination, this is the place for you. This is Grit and Growth Business.

Welcome to Grit and Growth Business. I'm Ralph. And this is the weekly show designed to help small business people just like you take their business to the next level.Now, if you missed last week's show, we talked about debt. We talked about strategic or dangerous debt.And if you missed that show or if you missed any of our shows, you can get them all by going to our website. That's gritandgrowthbusiness.com. listen, before I get into it too deep, don't forget, every Tuesday night I go live at 8pm Eastern Time.You can see our live show. It's really simple. A lot of people ask me, ralph, how are you? How does that work? I've never done a live show before. Here's what you do.Just go to your web browser and type in grit and growth business.com live. Really? That simple? Just grit and growth business.com live. And at 8 o', clock, you'll see my pretty face pop up on the screen. And you can participate.You can join us, you can put comments in the chat. My producer Abby will be there monitoring the chat.So I'm gonna encourage you to go join us every Tuesday night at 8pm That's at gritandgrowthbusiness.com/live now, you might be saying, who is this guy, Ralph? Listen, I didn't just start doing this yesterday. I've been doing this for 30 years.I've been working with accounting clients and consulting clients and I've been working guiding owners from survival to profitability. What I'm talking about today is really profitability.It's one thing to survive in your business, but it's another to start paying yourself and actually see some profitability.And I've helped hundreds of entrepreneurs design cash flow systems because that's what we're really talking about today is how do we develop a cash flow system that allows you to get paid consistently?Because here's the deal, if you're not paying yourself, you're going to get burned out really quick because guess what, you've got bills to pay just like everybody else. So you've got to figure out a way to pay yourself. And listen, I've also done this myself.It's not like I learned this as some theory booker in college at the University of Delaware. I've run several small businesses myself and I've learned firsthand. Listen, I've been in the trenches.I can tell you what it feels like to not be able to take that paycheck. But I've worked with people just like you, small business people who are hard working people.I've worked with people just like you to create pay systems that actually work. Now today I wanted to start off with some questions, really sort of some statistics. And I want to thank my producer Abby.She found these answers for us. As we were planning for today's show, we started thinking about what is the biggest obstacle why people can't pay themselves.So when asked why most small business owners can't afford to pay themselves a salary, small business owners cited these things. And I really want to get into these today because this is really what we're going to talk about. But these are the things that they listed.Number one, insufficient cash flow. Kind of makes sense if you think about it. If you don't have the money coming in, how do you pay yourself?Here's another thing to mention, and the listener question mentioned this directly. The other one is prioritizing vendor and expense payments.Yeah, people are making sure their vendors get paid, they're making sure their expenses get paid, and they're also making sure their employees get paid. Another big problem for small business people, why they're not able to get paid is high debt. We talked a lot about that in last week's show.Again, you can find last week's show@gritandgrowthbusiness.com but debt is a big thing. Is it putting its arms around you and strangling you that you're not able to pay your bills and not able to pay yourself a salary? Debt is a big one.So if you missed last week's show, I'm gonna encourage you to check that out. Another big reason noted is unpredictable revenue. Hey, I get it. It's hard if you don't know what's going to be coming in the door next week.And sometimes when you're first starting off in business, it's really hard to determine, hey, Ralph, am I going to have enough for payroll for my employees? Hey, I don't even feel I have enough for them. But how about for me? Unpredictable revenue makes that hard.But I've got some answers on today's show to help you do that. And here's another big one. And I actually think if I had to look at the percentages, I think this is probably the biggest one.Because I will tell you, this is what I was got stuck on. And that's that feeling of that need to reinvest to profit into the business. You might be right now saying, ralph, that's right, man.I've not taken a salary because I need to go buy equipment or I need to have that money to put that advertising budget out there. I get it. But let me just tell you right now, big takeaway already. You've got to carve out a way to pay yourself and pay yourself consistently.In fact, here's another statistic.38% of small business owners in the US said they don't take a salary for themselves at all because they chose to reinvest or cover operating costs instead. So 30%, more than two thirds people are working hard, but they're not able to take a salary. And then Abby and I started talking.I said, I wonder what the average length of time it is to where somebody can afford to take a salary. Well, I was kind of surprised by this, actually. I thought this number would have been bigger. But when we did the research, here's what Abby found.12 to 24 months before the average typical small business owner could consistently pay themselves a salary. Here's the thing. Here's the big takeaway from that. The thing that was noted in here is it's usually once the business reaches financial stability.Now, we did this on the live show. We talked about this last week. Do you ever really get to stability? Do you ever really get to that consistency?I was talking with a coaching client Yesterday, he said, ralph, I love what you said on the live show. He said, you said, the thing about consistency is there is no consistency. Well, I kind of agree with that.So today on the show, here's what I want to talk about. I really want to help you get to paying yourself. First, we're going to talk about how to make a fixed line item and not just a wish on your budget.I'm going to show you how to start small, but I'm going to show you how to start now.I'm going to talk to you today about separating owner pay from profit, how to make that system automated so that every time revenue hits, hey, you're going to get paid. We're going to talk about the rate percentages based on real revenue trends, not just pie in the sky hopes.And then we're going to talk about how to review and adjust this quarterly as the business grows. So if you're ready to get started, let's do that.But before I get there, I want to tell you, every time I do a show, every week, I put together what's called an action sheet. And this week's action sheet, you can get it by going to grit and growth business.com action.You go there, you enter your name, your email address, and it'll open up a portal where you can see all of our action sheets from all of our shows for all the shows we've done and all the shows we continue to do in the future. Again, go get your action sheet. It's.It's a couple pages that shows you exactly what we talked about today and the steps you can take to be successful in the topic we're covering today. Again, that's@gritandgrowthbusiness.com action. All right, so let's get into the gritty details.This shows all about looking at things and then getting into the gritty details. The first thing I want to cover today is you've got to treat owner pay as a fixed percentage.A lot of people say, wait a minute, Ralph, what are you talking about? Does that actually go into the budget? Yes, you got to think about it in terms of rent or in payroll.That compensation line, even for you, has got to live in that normal monthly budget. It's got to be operational, not just optional. That's the problem.A lot of small business customers say to me, ralph, yeah, I want to have that profit. And they put profit down at the bottom. And if there's anything left over, that's when they pay themselves. The problem with that is, guess what?If there's nothing left over. You're not getting paid.So one of the things that I encourage small business owners do, and we'll talk about this in a little bit, paying yourself first. But do that. Pay yourself first, put it in the budget. We'll talk about a percentage here in a second.But you need to put that into the budget, because as I always say, what gets measured gets done. Well, if it's in your budget, you're going to see it. You're going to say, you know what, Ralph, I've got to pay myself.I work with a lot of small business clients. I do coaching. I'll talk to you a little bit later about, about how to become a coaching client of mine with a free discovery call.But when I work with people, the thing I say to them, because I look at their profit and loss report and I'll say, okay, this looks great. I see your revenue, I see your expenses. Oh, there's your payroll cost. But where's your income? Where's your salary?They say, ralph, well, you know what? Whatever's left over, that's what I'm able to take. I think that's a bad plan. I think we need to build this into the model.It needs to be in your budget. Because here's one of the big takeaways. A lot of people say, well, Ralph, I'm really building this business so that one day I can sell it.Well, let me just tell you right now, one of the things a buyer is going to want to see is are you paying yourself? Because they may be buying this business as a passive investment.Well, they're going to need to bring in an operational manager where you're going to have to show a salary where that person's been making that money, and that's you and your business. So that's the first thing. Make sure that your compensation lives on your budget. That's number one. Let's move on to the second thing.I talked about starting small. Well, that's great, but start somewhere. You might be saying, okay, Ralph, how do I do that? I don't even know what my business revenue is going to be.Well, here's what I encourage you to do as a new business owner. Put a target down there. I think anywhere from 3 to 5% of gross revenue should be your target. And you're like, okay, girl, what is gross revenue?That's the top number. So if you're making $1,000 in sales, you need to be putting 3 to 5% of that right away into that owner compensation bucket.Because here's what it does. We start somewhere. Now listen, I don't think 3 to 5% is a long term strategy. I think you're going to get to a 15 or 20%.But this is a way to build that habit and it starts to reveal your true margins. Because I've seen many small business owners not even paying themselves.I look at their profit and loss and I say, look, Ralph, my business is doing well. And I'll say, yeah, it looks like your business is doing well. You got revenue coming in. I said, wait a second, how you paying yourself?Well, you know, I'm waiting for the business to grow a little bit, Ralph. I haven't quite gotten there yet. Well, here's the deal. Set something, set a goal for yourself.Because if you don't have a goal, you're never going to get to that goal, right? Kind of makes sense, doesn't it?So then once you set that beginning goal, and like I said, start at 3 to 5%, and then as the business grows, think about raising that. Maybe you talk about that quarterly, maybe you go to 10% after a couple months, then you go to 15%, then you go.Your goal is to make that number as big as possible, but start somewhere. So that's the second thing. Look at a percentage, stick to it and make that part of your plan.Third thing, this is a thing that trips up a lot of small business people. And this one is critical in my view, to really be successful in paying yourself.I'm going to encourage you to separate your pay from the profit and taxes. Let's talk a little bit about what that looks like. Owner pay compensates you for your work.That's the day in and the day out stuff you might be saying, Ralph, I'm a sort of a absentee owner. I don't really do any work. Well, listen, if you own a small business, you're doing work, let's be honest with each other.But that owner pay compensates you for your work. That profit at the bottom is not compensation for your work. That's profit from the risk that you're taking.And so many small business people mix the two together. They mix that into the bottom line and say, okay, Ralph, if there's anything left over, there's my profit, there's my salary.I think that's a mistake. Because when you do that, it hides the performance. It makes cash flow forecasting impossible.Because listen, if you bake into the cake, you know, if you think about building or baking a cake, right, you've got ingredients, you've got your flour, you've got your salt, you've got your eggs, you've got your oil. All those things go into creating that cake. Well, if you miss one of those things, guess what? Your cake tastes lousy.Or you put it in the oven and it just turns black because it's not cooking. It doesn't have the stuff that it needs to have in it. Well, you've got to think about your owner compensation first. Pay yourself first.One of the easiest ways to do that, I talked about this on a show a couple weeks ago, is create dedicated accounts. Here's what I'm going to recommend you do. Create an operating account. That's where the income and revenue comes in right from the start.And then carve out an owner's pay, a profit and a tax account. And then that percentage that we talked about. Let me just give you a simple example. Let's say this month you brought in $10,000 in revenue.Well, you've already decided, Ralph, 5% of that is going right away into my owner's pay account. So put that aside. I'm going to also encourage you to put aside money for profit and then put aside money for tax. Really carve those things out.I've got a few clients that have tested this and they tell me, ralph, I love this because it makes it simple. Every Friday, I pull out last week's financials and I carve out that money. It comes out of the operating account, it goes into my pay account, it.It goes into my profit account, and it goes into my tax account. And then I can really operate my business from what I have in the operating account.I'm not trying to figure out what I'm going to do, what my next move is, because here's the truth. And listen, as a small business owner, I've been here myself.It's so easy to look at your account balance and go, okay, well, I can buy that marketing plan or I can buy that equipment. But if you've carved out that money, guess what?You're going to learn to live on a leaner budget, and you're going to have to really live in that budget that you created. So pay yourself first. Carve out that money right away. And I'm going to tell you, test this out. Test me on this. It will make a huge difference.Which leads me to the fourth thing for today. It's all about automating the transfer process used to use or use for bank accounts. Use that separating operating account and that owner pay account.And listen, as soon as the deposit arrives, whether you do that daily, weekly, how do you do it? I think weekly is the bare minimum. You should do it.I've got some clients that do this daily, this week, the next morning after the day, they go and they transfer these monies out. Because then, listen, that money's gone. It's where it's supposed to be. They've automated that process. Move it immediately.Don't make it debatable, because here's the problem. If you wait too long, like I've had some clients say, ralph, you know what, let's do that on a quarterly basis.And I'll say to them, here's the problem.If you do that, you're going to get to the end of the quarter and you're not going to have the money where you think you're going to have it because you've already spent that money. We've already allocated that to something else. Well, guess what?If you're allocating that right away, that consistency is going to remove that emotion from the equation. Because listen, sales are going to go up and down.If you're a small business person, unless you've been established for a while, it's a bit of a roller coaster ride.That's the thing people say to me all the time, Ralph, I never expected when I went into business for myself, it's like getting on a roller coaster, man. There are ups and downs and sideways and upside downs and all those things. That's emotion. That's what we're talking about.The listener today was talking about that fear of paying themselves. That emotion will keep you stuck if you don't automate this process.So that's my big thing, big takeaway right here is to automate that, move those monies aside. Which leads me to the fifth thing, and I've kind of talked about this already a couple times, and I've alluded to this already.You've got to review that cash flow weekly. A lot of people say, well, I can just look at it at the end of the month, I can look at the end of the quarter. I don't think that's very effective.Here's what I see people doing. This is what I do myself every Friday.Just carve it out on your schedule, maybe 15, 20, 30 minutes and check your books, check your account balances, look at what bills are upcoming, and then do those transfers. Be bold in that, because it keeps you proactive instead of reactive. You want to be successful in business.Let me tell you, one of the big things that I've seen most business owners who are reactive don't last long. I hate to say that, but if you're constantly. I call it putting out fires. Client comes in, sits down with me. Or we do a coaching call.No, and I'll say, how's your week going? Oh, I had this situation going on. I had this situation. And. And they list for 20 minutes all the fires they put out that week.But the problem is that I say to them, okay, well how'd you make out with your strategic planning? Well, Ralph, I never got to that. Well, of course you didn't get to it because you are being reactive. You were just reacting to this situation.But you're not being proactive.The truth is when you see these multi billionaires who are successful in business, one key ingredient to most of those people is going to be their proactive, their planners. They put things in motion, they measure them, they look at their financials.Listen, I'm going to tell you right now, I know some very successful small business entrepreneurs making big money. They look at their financials every day. Day. I mean, they look at yesterday's performance and say, okay, what can we do better?What could we do differently? Because here's the thing. If you wait till the I got so many clients a little bit of a Ralph Ramit here.I got so many clients that come into me at tax time. Now we're talking about tax time. We're talking about months after the end of the year. We're talking about March and April.They come in and sit down at me and they say, ralph, how'd my business do last year? And I look at them like, are you serious? Like, we're in March and you're asking me how your business did last year.You ought to be knowing how your business did last week or yesterday. If you don't do that, you're never going to be able to spot those issues. You're not going to see those trends that you can correct.And that's a problem because listen, on tonight's show that we're going to be recording for the live show, I'm going to be talking about how to prepare for year end. Well, you've got to do that. You got to prepare for next week as well. So that's the big thing. Don't be reactive. Be proactive in what you do.And finally, you ready for a bonus? I was thinking about preparing for today's show.I said, what can I say to my small business clients to give them that a little bit extra incentive to really go back and look at financial operations. Well, here's what I'm going to encourage you to do.A lot of people have these for their employees or their contractors or the people that they work with. But set up a quarterly performance bonus for yourself. You might be thinking, Ralph, wait a minute. You want me to pay myself a bonus? Absolutely.You're putting in the risk, you're putting in the work, you're sacrificing family time, you're sacrificing. Listen, if you're choosing to spend your time in your business, you're choosing to not spend it doing something else. That's just the truth.Well, you should be rewarded for that. Right? So at the end of each quarter, it's one of the things I do with a lot of my small business clients, we have a sit down.That sounds like a mafia thing, but we have a sit down and we have a discussion. Okay, what, where's the performance of the business?If your revenue is growing, you've got good reserves, raise your pay a little bit, this is the time we'll make that adjustment we talked about at the beginning, that 3 to 5% for owner's profit. But maybe at the end of the quarter, we're like, man, things are going really well. Let's adjust that to 10%. Let's, let's do a reach for 15%.Maybe we do a one time bonus. Maybe it's a way to fund a retirement plan.That's one of the other things I probably need to do a show about that it's time to fund a retirement plan for yourself. Well, a quarterly bonus is a great way to do that.And if we're doing this quarterly, if we start to see that cash is tightening, maybe we're going through a recession, maybe we're going through a downtime, then you hold steady on that. But you've already got your money set aside in your owner's pay account.You've already got your money set aside in your tax account so you can make adjustments and not worry so much about cash flow. So those are my things again. Let's go over those again one more time. We're gonna go from top to bottom.So number one thing we're going to do is we're going to treat owner's pay as a fixed expense. Second thing we're going to do, like I said, we're going to start somewhere. We're going to start with a small sustainable percentage like 3 to 5%.We're going to let that grow. Third thing we're going to do is we're going to separate owners pay from profit and taxes because we want to pay ourselves first.We're going to automate the process. Number five thing we're going to do is we're going to review cash weekly.And then what we're going to do, we're going to set up that bonus structure for ourselves to pay ourselves that quarterly bonus every quarter. Well, now you're ready for some gritty things that you can do this week to implement what we just talked about. Here's my action plan.And again, this will be in our action plan that you can download grit and growth business.com action. Get that action plan. But here's the action plan to make owners pay. Happen for you every time. Every time. So here's number one thing.Start by opening two accounts. Maybe you're not into that. Well, Ralph, I don't know about four accounts. It's a lot of work at the bank. I do think that's a better plan.But let's say right now you're like, you know what, Ralph, let me take a baby step here. Let's open up two accounts, an operating account and an owner pay account, and then make that decision. What is that percentage going to be?That's my second step. Decide on that starting percentage. I'm going to. I'm going to push it to that 5%. I think you've got to have an idea of what you're trying to get to.So set that. Here's what I'm going to do every week. Remember, we're going to do it weekly. Every week.I'm going to put 5% in that second account, that owner's pay account, and then automate that. Set the rules.Hey, you can even go into your accounting software and set it up to automatically move a certain amount every week so that, listen, it's done. You don't have to build in that emotion because here's the thing I've noticed in my own life.I've really been focusing lately on putting the money into a reserve account, building that business emergency fund. Well, if I think about it too much, I overthink it, then I don't do it. So automate that and pay your cell phone schedule. Make it a cadence.Whether it's weekly or bi week. I always say this. If your employees are getting paid weekly, pay yourself weekly.If your employees are getting paid bi weekly, pay yourself bi weekly. You deserve that. Make it consistent, keep doing it, but track your progress.Whether that be in a QuickBooks software, whether it be in some kind of Spreadsheet or something. Listen, monitor that. Look at your owner pay percentage.A lot of people, I'll ask them, I'll say to small business clients, if they're coming in as a new client, I say, what's your owner pay percentage? You look at me like, ralph, what are you talking about? That's a number you should know. Yes.A lot of people say, well, Ralph, I've made this much in revenue. That's great. Revenue doesn't tell me much because you could be giving away the store.Like, you could have a ton of revenue but not be making any money. But if I hear a client say to me, oh, Ralph, I'm consistently taking a 15% owner pay percentage, I'm like, oh, this person knows what they're doing.Because the next question I'll say to them is, what's your profit percentage? Oh, Ralph, you're never going to believe this. I'm taking another 15% in profit. Well, think about what I just said.Now I've got a business owner is not focused on the revenue. Yes, they're building the revenue because they got to do that. But they're taking a 15% owner's pay percentage and they're taking 15% in profit.Now, I'm going to tell you right now, that particular business owner, there's a couple that I can think of that come to mind right now. They're carving out those four accounts. So big takeaway right now is those four accounts really do work. So think about doing that.The operating account, you pay yourself account, your tax account and your profit account. It really does work. Which reminds me about our live show again. I mentioned that a couple times.We just launched that a couple weeks ago and man, the live show has been great. Again, it's simple to get to. It's not like you have to tune into some TV station. Just go to gritandgrowthbusiness.com live.Just pop in there, 8pm Eastern time every Tuesday night. Well, let's end with some questions. Let me ask you these what I call my key questions for today, the key takeaways.What stops you from paying yourself first? As I've talked about this today, we talked about those statistics we started off with. Those percentages at 38% aren't paying themselves.Well, what's stopping you? Is it the fear of cash flow or is it just a habit? They say that to get into a habit, it takes about six weeks to build a habit.I'm gonna encourage you. Build that habit right now. You can do that today. You can start this Week. You say, listen to Ralph. I'm going to build that habit.Second question I want you to ask yourself, and this is all about that mindset. How would your mindset shift if you saw owners pay? Listen to this one as proof of business health. Remember I talked to you about that a minute ago.The client came in and I said to him, what's your owner's pay percentage? That's your business health. It's not selfish. A lot of small business guys will come in there, men and women both.I got both men and women, small business clients. What? They'll come in and I'll say, ralph, I kind of feel selfish if I'm taking Sally for myself. I'm worried that my vendors aren't going to get paid.I'm worried that my employees aren't going to get paid. Listen, I think you should pay your vendors and I think you should pay your employees, but you should also worry about paying yourself.You want to get burned out, don't pay yourself for a while. This is where I see business owners. So listen, I just had a client. I guess it's been about a month ago. We sat down, we actually did a zoom meeting.As I recall, she had just started a new business. She brought in some employees and she says, ralph, I'm really struggling financially. The cash flow isn't there. I'm going to go get a second job.I'm like, wait a second. You're going to go get a second job? You have your own small business. She goes, yeah, I just can't take up salary from my business.I said, well, we got to fix this. There's a problem here.When you're looking at, I'm going to go get another job so I can bring in money to pay my bills because I have a business that's not performing, that's not a good plan. That's like eating leftovers. I want to have the dinner first. I want to have the meal. If there's leftovers, great. I love leftovers.But man, I want to experience that meal first. I don't want to be a business owner worrying about, is there any going to be left over for me? So ask yourself that question.If you change your business decision and your paycheck depended on consistent profit, not leftover cash, how would you operate differently?I'm encourage you to do that this week because if you're not getting paid, like that client I talked about a minute ago, if you're not getting paid, guess what? Your model needs fixing. It's not about more hustle we got to figure out what's going on. And your owner's pay structure, it's not luck.This isn't like I'm going to the casino and I'm putting it all on black and spinning the wheel and hoping I'm not pulling the arm on the gambling machine and saying I hope it comes in for me, that's not the way owner's pay needs to work. So start small, stay consistent and adjust as you grow. And let's see that happen. And here's the best part.You don't need to figure all this out alone like I talked about. You can come see me on Tuesday nights Eastern Grit and growth live. This is where I do live coaching.You can ask your question maybe thinking, Ralph, I got a ton of questions after today. Well join the live show. But maybe the live show isn't for you. So I also have this thing called coaching services.I've designed a program that I can help you work with your business one on one. It all starts with a discovery call. You can get to that by going to grit and growth business.com coaching in that discovery call absolutely free.You're not going to pay a dime for this. We're going to talk one on one. Let me understand your business. Let me understand what's going on with your business. Let me learn your business.If you're interested in doing that again, go to gritngrowthbusiness.com coaching and let's work together and I'll help you take your business from where it is now to where it needs to be. And again, don't forget to join me live@gritngrowthbusiness.com now here's the deal. You're hard working. I know that you've got grit.But it's time you get paid and it's time to get paid consistently so that you can grow. So I'll see you next week in the trenches. God bless you and you have a great day today.