SAN FRANCISCO — A business’s ability to pay its owner well isn’t a mystery to be solved once and forgotten. It’s a question worth asking on a schedule.
That’s the thrust of the closing framework from a recent SCORE webinar, “Paying Yourself as a Business Owner: Build a Sustainable Owner’s Salary,” presented by Jessica McKellar, co-founder and CEO of Pilot, a bookkeeping and accounting firm. In Part 1 of this series, we looked at the data behind why so many owners go unpaid or underpaid, and the two traps that keep them there. In Part 2, we followed McKellar’s team as they rebuilt a longtime small-business client’s books and applied a three-lever framework to try to close the gap. Today, we’ll close with McKellar’s own framework for finding your number.
Three Questions
McKellar boils the entire exercise down to three questions any owner can ask themselves.
“The first question is, what do you want to pay yourself? What is your goal, and what number achieves the goal?” she says. The second is which of the three levers (margins, revenue or operating costs) gets you there. The third: “Do you have the financial visibility and support to figure out what it would take for the business to get yourself to being able to pay that number?”
“When you work backward from that number,” McKellar says, “the business stops being a treadmill and starts being a machine you’re building intentionally.”
Salary Is Shorthand
One attendee raised a wrinkle that applies to plenty of drycleaning owners: how do you pay yourself a regular paycheck through an LLC, where profits legally pass through to the owner rather than getting paid out as a salary?
“I used salary here as a shorthand for any way you’re pulling cash out of the business,” McKellar says. Whether that’s a formal salary through a C-corp, an owner’s draw through an LLC, or something else entirely depends on entity type, she says, but the underlying question doesn’t change: does the business have the economic profile to support what you want to pull out of it, on a schedule you can count on?
What Should You Charge?
One attendee asked how to set a markup rate after a professional recommended jumping from 15% to 60%, well above what the business had planned for. McKellar says there’s no universal formula.
“It’s going to come back to what kind of business you’re running in the context of a broader market,” she says. “How much markup can you do? That’s going to partially be about what your peers and competitors charge for the same products or services.”
She also pointed to a piece owners routinely underestimate: rates usually only change once or twice a year, so each adjustment needs to hold up for the next 12 months against rising labor and materials costs, not just today’s numbers.
When Revenue Is Uneven
Another attendee, running a business with feast-or-famine months, asked how to plan around income that swings wildly. McKellar’s answer applies just as well to any seasonal service business.
“You have to be able to plan and forecast with the actuals of the business,” she says. “This is my average income, this is my average net income, because we can look at this on a rolling three-month or six-month average.” For businesses with real seasonality, that means planning against a full 12-month cycle rather than any single strong or weak month.
Getting the Help You Can Trust
Asked what kind of advisor handles this work, McKellar pointed to financial planning and analysis, a discipline practiced under many titles, such as accountants, fractional CFOs or business consultants.
“The thing that you have to be careful about is folks who are not the numbers people,” she says. “They’re good at talking about stuff, but they’re not actually able to run their numbers and talk from the numbers. You don’t want that.” Whoever you hire, she says, should be transparent about cost from the start: “It needs to pay for itself. Otherwise, you should just not do it.”
At a minimum, McKellar says every owner should be getting two reports from their bookkeeper monthly: a balance sheet and a profit-and-loss statement. “And then you need to get comfortable looking at them,” she says.
As for how long it’s acceptable to go without paying yourself at all, McKellar says that depends on how important the income is to the owner. But for anyone who’s been putting it off, her advice was simple.
“Ideally, from day one of the business, you would be running the business from the numbers,” she says. “But the best day to start is today, if you haven’t already.”
For Part 1 of this series, click HERE. For Part 2, click HERE.
Have a question or comment? E-mail our editor Dave Davis at [email protected].
