How to Determine Your Owner’s Pay Percentage
You did it. You put profit first in your business. You’ve been able to pay yourself and successfully grow your business. Your sales are increasing, but so are your expenses. But how do you know when the time is right to adjust your owner’s pay percentage?
The Profit First model puts you first. As your needs change—it’s time to adjust, not reinvent the wheel.
Some things to consider include:
- How much do you need to set aside to support yourself and the growing needs of your business? Your family?
- Have you thought about retirement and investments?
- Are you starting to borrow from your business to cover personal expenses or vice versa?
Your needs are evolving. The more committed you are to the Profit First principles, the stronger you and your business will be.
Let’s take a look at how to know when it’s the right time to adjust your owner’s pay percentage. We should note that it’s important to look at all your allocations, including your owner’s pay, on a quarterly basis.
You want me to keep how much?!
Many business owners have a difficult time putting profit first. Whether it be a lack of confidence or a case of imposter syndrome, adjusting your mindset is usually step one when implementing a Profit First system into your business.
You live your life comfortably by allocating $5k a month to owner’s pay. Let’s say that’s 30% of your current revenue, but we recommend you pay yourself 50% as owner’s pay. Why do you need 50% if you know 30% is comfortable for your lifestyle?
By allocating 50%, you create a buffer for yourself and your business when the unforeseen occurs—because it will happen. It’s okay if you have more in your owner’s pay account than you allocate each pay cycle. This gives you real security for your family so you know you’ll get paid if the unforeseen happens (like a pandemic, maybe?).
If 50% still feels like a lot, increase your owner’s pay allocation incrementally. If you’re at 30%, allocate 33% next quarter, then 35% after that. You can (and should!) slowly work your way to a 50% owner’s pay allocation.
Most people do not pay themselves as much as they should, but with incremental increases and mindset shifts, you can keep you and your business out of the financial ER.
My revenue is up, so now what?
As your revenue grows, the amount you’re allocating to owner’s pay will naturally grow too. But your increased revenue has led to a few more expenses than usual, and your Profit First plan is starting to run a little out of whack.
Maybe you hit the $250k/yr milestone, added a couple of new employees, and you’re working less. The future looks bright, but you need a little more financial wiggle room than you had when you were making $150k/yr.
According to Profit First principles, it’s time to adjust your owner’s pay the other way. By lowering your owner’s pay down to 35%, you can still pay yourself (and your buffer) an amount you’re accustomed to while creating more flexibility in the business’s financial needs.
Once you hit $500k and have a small army of people working for you, we recommend adjusting your allocation to 20%, and so on.
Contrary to what most people believe, it’s not total business income that creates a successful business. It’s profit. By folding all your revenue back into your business, it might feel successful in the short term. But the stability created by the Profit First model affords your business the financial security that defines true success when a crisis hits. And it ensures that you, the business owner, are paid fairly for your time and expertise.