Dear Owner-Operator, Pay Yourself A Salary
Entrepreneurship is scrappy. It requires sacrifice and perseverance. During the startup phase, the owner-operator is typically under paid, and is often times the last to get paid. To make ends meet, the owner-operator may take arbitrary distributions "whenever the business has the cash-flow to support it." While this is a necessary evil for a startup, as the business matures, the owner-operator must begin to take a market-based salary just like every other employee. A failure to do so will artificially inflate the numbers, which will cause a whole host of problems later. Let me explain.
"If you work in the business, as the owner, and you do not take a salary, your financial statements are inherently inaccurate because they won't capture the full cost of running the business."
Here is an example, I started Financial GPS nearly two years ago, circa December 2017. When I first launched, I did everything - marketing, operations, finance & admin, and all of the strategic planning and visionary stuff, too. I was spread razor thin and nothing was done particularly well. I just needed to test my hypothesis -- small businesses would use a virtual accounting solution that leveraged explainer videos and zoom-conference calls in lieu of face-to-face financial meetings to save time and money. Fast forward two months, and I got my answer, Yes! Then it was time to hire people and professionalize the company.
During this proof of concept, startup, phase. I didn't take a salary. Everything had to go back into the business to ramp things up. However, as we began to hire and standardize our processes, I knew that I had to take a salary as well since I made day-to-day contributions to the company, as an owner-operator. I had to be on payroll like everyone else. In my current role as the head of marketing, I oversee content marketing and social media. One day I plan to hire someone in the neighbor of $40K per year to do everything that I am doing now. Since that is what the position is worth in my estimation (given our size and capabilities), that is what I take as a salary.
Image if I didn't draw a salary. Every month when Liz and I reviewed the numbers, our profit margin would be inflated by amount $3,340.00. We'd be kidding ourselves. Seeing an inflated profit figure would cause us to make bad financial decisions, spend too much, and it dulls our ability to critically evaluate the business. By taking a market based salary - and running the all of the operating expense thru the P&L - we can honestly appraise the business and run it based real financial statements - not some inaccurate report compiled to stroke out egos.