Business Tip: Plan to pay yourself from the beginning
By Joe Humphreys
Next month, I will celebrate eight years with the UHV Small Business Development Center.
In that time, I have met with more than 650 individual clients. When I first started, I assumed all businesses were different and unique.
What I have learned over time is most businesses have the same problems with unique owner personalities.
In writing this article, I would like to address one issue I have encountered over and over again - owners not paying themselves from their business. When starting a business, a prospective owner has to create a budget with honest and realistic expectations both in the revenue potential and the cost of operating the business.
Typically, the income is overstated and expenses understated, it looks better and makes the decision to go into business easy. The one expenditure left off of the planning budget typically is the personal salary of the owner.
Often times I hear, "I am putting everything back in the business" or "I want the business to succeed" or, my favorite, "my spouse makes a good living and I don't need a salary."
Whether your business is to pursue a passion of yours or to provide you with a job, it should bring in money to your household. In setting up your business plan and model, your planned owner's draw or salary should be included as a fixed cost for planning your break even and profit. Along with profit projections, money to pay notes and money for an emergency fund, owner's draws have to be planned and expected from the beginning.
After you have done your research, your planning, and your business modeling, if your business will not be able to pay you, you should rethink your decision to go forward.
One of the discussions I often have with clients in regard to starting a business is to run the business on paper, before renting property or investing any money in it. If the business will do everything you need it to do and show a promise of success on paper, it just may work in the real world. Your business should be able to do three things financially, pay the financial obligations you have, give you a return on your investment, and pay you a decent salary. All three are important.
Joe Humphreys is the director of the UHV SBDC and a Certified Business Advisor IV. If you would like help with the planning or testing the information you have with one of the advisors of the UHV SBDC, call usat 361-485-4485, or firstname.lastname@example.org.