Are You Paying Yourself?Posted by Jessica Oman
Last week I offered some quick and dirty tips on how not to write a business plan. One of those tips was a reminder that you have to pay yourself something – however modest – out of your business. I have (amazing, wonderful) clients who have naively said things like:
“But Jessica, I can live on surprisingly little!”
I’m sure you can. In fact if you’re doing business in Vancouver or Toronto like we are, you might have no choice but to bootstrap. But chances are your current job has some kind of benefits, like paid vacation or EI contributions or health and dental coverage or life insurance. Could you get by without that while your business grows? If so, what’s your plan to reintegrate it? Life happens. You might have a child or have to take care of an elderly parent. Someone who you depend on may get injured. Interest rates might rise and your mortgage payment will go up. If you don’t structure your business to support you when these things happen, it could fail. Or YOU could. Be realistic.
“It doesn’t matter what my income is, I have no debt”
Is your business a sole proprietorship? Are you getting bank financing to launch your business? If you answered yes to both of those questions, you’re about to have debt. And if your business can’t pay its debt, the law says you have to. So you need an income in order to do that.
“I don’t mind not making money as long as I’m doing what I love.”
That’s very sweet. The honeymoon will last six months if you’re lucky. When you’re spending 12-14 hours a day in your business, living off of coffee, getting less social interaction than you’re used to, and missing your workouts all so that you can spend as much time as possible “doing what you love”, you’ll probably stop loving it.
The takeaway: make room in your business plan to compensate yourself modestly and fairly. You don’t need to go for the big salary right away, but make sure you have a thorough understanding of how much money you need to live the lifestyle you’re currently living, and put that line item in your expenses. You’ll be really glad you did.