As an owner of the business, you need to earn a return on that investment. In the Profit First system, money is placed in a PROFIT account to make sure you’re seeing an ROI. That you’re getting a return for all the risk you are taking on by simply being an owner, whether you work in the day-to-day operations or not.
We also use an OWNER’S PAY account for owners who do work in the day-to-day operations of the business.
Some people make the mistake of assuming the PROFIT and OWNER’S PAY accounts serve the same purpose. They don’t!
Each of those accounts benefit you as the owner in different ways.
Profit distributions from your PROFIT account are for celebration and not for day-to-day personal expenses. This is your return for owning the business.
I have used the last three years of profit distributions to put in a pool, a barbecue area and a covered patio, and I bought and fully paid for two new cars. My qualify of life has definitely increased. But it’s important to note that I am not using my profit distributions to put food on the table, cover my mortgage or keep the lights on at my house.
The OWNER’S PAY account is for if you work in the day-to-day operations of the business. You should be paid for that work and it should cover your basic living costs. And as you just read, the profit distributions make up for whatever you feel like you’re lacking from the OWNER’S PAY account.
It is imperative that your lifestyle cost be no higher than the amount of money you take out of your OWNER’S PAY account. You can’t rely on your quarterly profit distributions (which come from your PROFIT account) to support your lifestyle.
What if your take-home pay isn’t enough for your lifestyle?
Your immediate fix is to reduce your personal expenses. The long-term fix is to run the Profit First system, which will make your business financially fit and lead to higher take-home pay.
How do you know if the business can support your take-home pay?
At a minimum, you should be able to get market rate for the work you perform. If you’re coaching classes, then you should be paid just like a coach would be paid. If you are cleaning the bathrooms and floors, then pay yourself the same amount a cleaner would be paid.
If you aren’t paying yourself enough, then chances are the business’ operating expenses are too high.
For example, sometimes gym owners hire coaches or additional coaches before their gyms can afford it.
We hear the advice that in order to grow, we need to work on our business and not in it. So, we take the leap and hire people to do the work. Unfortunately, that transition was never meant to be a leap. It’s supposed to be more like a hike with multiple steps between the start and the summit. With a healthy business, you will be able to make this financial hike. Be strategic about how fast you take things off your plate, freeing up your time in exchange for cash.
Analyze Your Expenses
To find out where you may be spending too much, analyze your expenses carefully. You might find that you need to take some classes back and coach them in the short run. Or you might find other expenses that are unproductive for the business. Your motivation is that every dollar freed up will go toward paying you more money each month.
Is it possible to pay yourself too much?
If your business is running on autopilot, clients are having great experiences and your retention rates are better than industry averages, no. Feel free to overpay yourself. Fair warning, we have rarely seen that scenario. You’re likely overpaying yourself because of another reason, and it’s never an easy conversation to have: basically, the business cannot support your lifestyle.
In that situation, there might not be anything inherently wrong with the business’ finances. It could just be you have more expensive taste than you can afford. This could lead to not having enough money to pay your taxes come tax time. It could negatively affect the customer experience because you don’t have cash available to meet their needs. Or it could mean you’re racking up credit-card debt or taking loans and not even realizing you are borrowing money to support your lifestyle.
If you are paying yourself too much, you have two solutions: Increase the business’ revenue so that your current pay is spot on or cut back on living expenses.
No one is asking you to fall on your sword here. You aren’t going to reach your full potential of helping the world if you can’t sustain your life from your compensation. You deserve to be profitable and to make a great living while helping others…
But there are times when the lifestyle expectations are unrealistic for the moment.
Note – “for the moment”, as in temporary, because as you embrace the Profit First system your cash flow increases steadily which leads to increased owner’s pay.
If you might be paying yourself too much, I’m asking you to take a step back and come up with a plan that moves you to the lifestyle you expect. This is like taking an enjoyable hike instead of a giant leap.
How to Audit Your Expenses
In the Profit First system, we will teach you how to analyze your numbers to figure out if your pay is spot on or if you are paying yourself too much or too little. Here’s the short version: We need to figure out what you need to take home to cover your current lifestyle.
We just want to figure out the smallest amount of money you would need from your OWNER’S PAY account.
When figuring out how much you need to support your lifestyle, start by looking at how much money you should or could spend in each of the five categories:
- Housing Costs—This is your mortgage payment or rent payment. This is also anything else you spend on your house, such as utilities, repairs, home improvements, decorations, cleaning supplies, and any item you consider a household item.
- Transportation Costs—Car payments or leases and the gas you put in them are the common transportation expenses. However, we do have clients who live in New York City, for example, so they don’t own cars. For them, this category is likely for expenses such as the subway, Uber or taxis.
- Sustaining Life Costs—We need food to survive, so your groceries are an obvious expense in this category. The typical gym owner also has a good number of supplements he or she is taking. That expense would also go here. As much as some may want to, you can’t really walk around naked all the time, so clothes to cover your nakedness go here. Your personal insurances—such as health, life and disability—would also go here. I personally need a massage and chiropractic adjustment at least once per month, so I would put those here. If you don’t need those, then it doesn’t sustain your life. Also, if I am currently trying to figure out how to lower my lifestyle costs, the massage and adjustment are luxuries that I would need to take out. The same might go for my supplements.
- Fun Expenses—Anything you do for fun goes in this category.
- Everything Else (Miscellaneous)—This is your catch-all category. Put anything else you spend money on here.
You might be thinking that putting your personal expenses in these five categories feels like creating a tedious budget. I’m asking you to place your expenses into these specific categories because the categorizing of your expenses will give you clarity as you move to the next step of this process, in which you ask, “Do I really need this personal expense right now?”
How Much Money Do You Need?
When determining your survival take-home pay, you can eliminate all expenses in the “Fun” and “Everything Else” categories. Just rip off the band-aid, you’ll be fine.
Next, you need to go through the other expenses and decide if you really need that personal expense to survive. If you are eating out five times a week, maybe cut that back and save some money. Maybe you have health insurance, life insurance and disability insurance. Look for cheaper options or cut some or all of them for the short run.
Before you add up your expenses, go ahead and review the numbers one more time. Remember that the point of this exercise is to figure out the smallest amount of money you would need each month. I personally like knowing this number because if the stuff hits the fan, I know at what point I need to start stressing. As long as I’m making at least this minimum income number, I can survive.
Now go ahead and add up all those expenses into a monthly amount. This is your minimum take-home amount needed.
In my book, “Profit First for Microgyms,” this number will come in handy as we compare your “survival amount” to what your business can currently afford to pay you. If you already know that your business can’t afford your lifestyle, go back and see if you can take any expenses out of your life that aren’t absolutely necessary. To keep an expense, they must be absolutely—without doubt necessary.
Over the past 20 years, I have seen a lot of justification for expenses that were not absolutely necessary to sustain life. So please, if you find yourself in a difficult situation with cash, be honest with yourself.
I promise that if you implement Profit First, any cuts to personal living expense will be short term.
Because you deserve to be profitable, and the Profit First method will get you there.
Not to mention, your legacy needs the fuel of profit to survive.
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