Maximize Your Owner’s Pay Compensation Package
Reason #12 for Implementing Profit First in 2024 - Maximize Your Owner’s Pay Compensation Package in 18 months
Why did you start a business? Many business owners find that it is easy to lose sight of their “why” when they are caught up in the “how” to run their business, day in and day out.
When you own a business, especially a start-up or during a period of transition, the owner can default to a mode of “self-sacrifice.” While common, it is not always necessary – and certainly is not meant to be permanent.
In entrepreneurship (and small business), we want you to THRIVE. That is why we believe so passionately in the Profit First method, and helping other business owners achieve success through implementation.
Let’s swing the conversation to the other end of the spectrum… What would it look like to MAXIMIZE your Owner’s Compensation? What is your potential?
By the method, here are the brackets for annual revenue and the allocations for the foundational accounts - PROFIT, OWNER’S PAY, TAX, and OPERATING EXPENSES.
Let’s look at some numbers.
For reference, here are the TAPs (Target Allocation Percentages) from the Profit First method:
As you can see, as your business annual revenue grows, the percentage allocated to your Owner’s Pay account changes over time. In the early stages of business growth and development, the Owner’s Pay is prioritized at 50% to demand efficiency and sustainability. If you are not paid in this early bracket, you are less likely to feel motivated to make it to the subsequent brackets!
Examples:
Annual Revenue $100,000 x 50% = $50,000 Owner’s Pay allocation
Take it to the max: $250,000 x 50% = $125,000 Owner’s Pay allocation
In the second target income zone, you see a dip in Owner’s Pay as a ratio of total revenue, from 50% to 35%. This allows for a fair and market based wage to be established (minimum of $87,500), and an overall compensation package to include the allotment for higher Profit and steady Tax rate (15%).
Examples:
Annual Revenue $250,000 x 35% = $87,500 Owner’s Pay allocation
Take it to the max: $500,000 x 35% = $175,000 Owner’s Pay allocation
Moving into the 3rd revenue bracket, we see another dip in Owner’s Pay, but an increase in Profit and Operating Expenses, while Tax stays steady. The reasoning here is that to reach these revenue goals, it is most likely that your business will need the cash on-hand to up-level your team, assets, and other operating expenses, which demands a higher Operating Expense ratio. Again, we see a minimum set for the Owner’s Pay ($100,000), and ability to pull from a higher Profit and steady Tax allocation.
Examples:
Annual Revenue $500,000 x 20% = $100,000 Owner’s Pay allocation
Take it to the max: $1,000,000 x 20% = $200,000 Owner’s Pay allocation
At the $1 million dollar revenue point, we set the Operating Expenses at a steady 65% moving forward. Tax remains steady at 15%, and there are slight modifications between Owner’s Pay and Profit. The rationale here is likelihood of partnerships or shareholder payouts, rather than a single owner salary to maintain at these levels.
Examples:
Annual Revenue $1,000,000 x 10% = $100,000 Owner’s Pay allocation
Take it to the max: $5,000,000 x 10% = $500,000 Owner’s Pay allocation
Want to do this in 18-months? Our Profit First Coaching programs are built to make your financial dreams a reality! Full implementation and optimization of the Profit First method can be done in over the next 6 quarters.
At Beyond Your Books, we take pride in helping our clients bridge the gaps between revenue brackets, set realistic and timely goals to achieve higher levels of success and permanent profitability in their businesses. We are very proficient in helping small business owners graduate the first Profit First revenue bracket with ease as they move and grow to reach new heights and understanding of their day-to-day and year-over-year cash flow trends.
Bottomline: Your Business needs to pay YOU. It needs to be profitable to be sustainable. We help to support small businesses that operate ethically -- which includes compensating yourself regularly and fairly.