“How much should I / can I pull out of the business?” is a question we get asked almost everyday. There are two primary ways a business owner gets paid from the business and it’s extremely important to understand the difference between the two.
For business owners, what is the difference between a Salary and a Profit?
Owner’s Salary is your reward for being a good technician (an accountant, a PT, a psychologist, a Videographer, a Financial Planner, a Physio etc).
Profit is your reward for being a great business person (building systems, developing team, defining vision and strategy, improving the numbers, sales and marketing).
It’s the difference between working ON the business and working IN the business.
Think about Clark Kent vs Superman as the difference between Salary & Profit.
Ultimately we all want to be like Business Supermen and Superwomen, with the cashflow and profit to –
- Be strong (financially)
- Help those in need
- Protect our family
- Fly around with nothing holding you back
- And even wear a red cape and your undies on the outside.
But even Superman earns a Salary.
Coming back down to earth, Superman hangs up the cape and becomes the reporter that is Clark Kent.
So now that I know the difference between my Salary and my Profit, how much of each do I take from the business?
Getting Cashed Up is about taking a healthy amount of money out of the business. Here’s what we’ve seen to be healthy.
$0 to $250k Revenue – 5% Owner’s Profit and 50% Owner’s Salary
$250 to $500k Revenue – 10% Owner’s Profit and 35% Owner’s Salary
$500 to $1M Revenue – 15% Owner’s Profit and 20% Owner’s Salary
$1M to $5M Revenue – 10% Owner’s Profit and 10% Owner’s Salary
$5M to $10M Revenue – 15% Owner’s Profit and 5% Owner’s Salary
$10M to $50M Revenue – 20% Owner’s Profit and 0% Owner’s Salary
The rest of your revenue goes to the tax man and to paying for the many expenses of running a business – rent, wages, subscriptions, insurances etc.
So when can I give myself a pay rise, without bleeding the business dry?
Naturally you want your business to fund your growing lifestyle and aspirations but it’s important to take things easy and not take too much too soon.
Taking too much money from your business too soon would be like not giving a growing baby enough nutrition and sustenance that it needs in the early days in order to grow into the strong adult it has the potential to be. You will stunt your growth.
Taking too little money from your business can similarly starve you, the business owner, of the vital funds you need to live a good life. We’ve seen way too many entrepreneurs who haven’t paid themselves in years, haven’t been on holidays since they started the business and feeling totally unrewarded for all the hard work they do. A highly unrewarded founder can result in poor performance, lack of endurance and low energy & enthusiasm in the business (which starts a cycle of even worse business results and even less available revenue.
So stay within the healthy ranges for Owner’s Profit and Owner’s Salary and as you increase your revenue and reduce your unnecessary expenses, you’ll be able to take more and more.
Why does the suggested Salary go down while the Profit go up?
You may have noticed that Owner’s Salary goes from 50% > 35% > 20% > 10% > 5% > 0% as the revenue increases. Why is that?
Ultimately being the owner of a Cashed Up business isn’t about HAVING to show up every day to be a good technician (an accountant, a PT, a psychologist, a Videographer, a Financial Planner, a Physio etc).
In fact it’s impossible to achieve high levels of revenue if YOU are the only one that can deliver your product or service. You only have so many hours in the day after all.
As you employ more technicians they will be the ones who “work IN” the business while you transition to “work ON” the business.
That’s why the goal is to ultimately pay you nothing in Owner’s Salary because we don’t want you having to work as a technician. Your reward lies in Owner’s Profit, which we now know is your reward for being a great business person.
So ask yourself –
What systems do I need to build?
What team would I need to assemble?
What is my future vision for the company?
What are the KEY NUMBERS that will indicate that I’m on track with my vision?
How can I improve my sales & marketing systems?
Answer these questions well and implement the ideas like crazy and you are well on your way to getting Cashed Up!
FAQ: Why does the Cash Rich Business method teach us to put only 15% aside for tax, when I pay way more than 15% tax!?
Good question –
You probably pay more than 15% tax, some of us pay up to 47% tax but you have to remember what this is a percentage of …
Let me explain –
You are taxed on your profits, not your revenue. That’s why in one sense it’s good to pay more tax, because it means you’re earning more profit. Just don’t pay more than you are legally required to! So according to Cash Rich Business, for $100 real revenue, you’d put aside 15% or $15 into your Tax – No Temptation Bank account.
Is that enough for the Tax Man?
Well let’s assume you pay tax at 20%. If $100 real revenue came in, and you incurred $50 worth of expenses, you’d pay 20% tax on the $50 that’s left – which goes to
Profit and Owners pay.
Tax Due (20% of $50) = $10
Balance in Tax reserve = $15
So the 15% of Real Revenue is a Target Allocation Percentage for tax, which aims to cover both your business (profit) and personal (owners pay) tax obligations.
Does that make sense now? As always, post any questions below.
Where 99% of business owners go wrong is they use tax, profit and owners pay to fund operational expenses which are way too high, and they never, ever become a Cash Rich Business. What a shame.