Your Business Finances
So, let's talk about the money side of things. The first step in figuring out how you are going to find the money to hire; is to separate your personal and business finances. Separate your personal and business finances. Now I know that this is a sophisticated audience of small business owners who would never co-mingle their business and personal finances. Right?
That's right. Shelly, I'm not talking to you. (audience laughter) Shelly, I know you've got this covered. Who does not have this covered? Let's be honest. I will start, I did not separate my personal and business finances for 4 years. Okay? So, this is a shame-free zone. (laughter) I didn't do it for 4 years. Who else hasn't separated their personal and business finances? Sharon? Who waited too long? (Audience commenting and laughing) No, you guys are awesome? Alright. So, then I have the shame here. (laughter) But, I just seriously if you're watching at home and you're like man I know I'm supposed to do this but I haven't d...
one it yet. I have been there, I have done that, do it now, do it now. (deep breath) So, okay, it's time to sit down for this part. Because, this really I mean this was something I felt, we're going to talk about this for a while. Because, even though these guys have this figured out. This is so, so, so, so important. Because, I could not wrap my head around hiring, I couldn't wrap my head around investing in high ticket expenses, until I separated my business and personal finances. And, the reason for that is that your money is not your money first. Your money is your businesses' money first, right? Every client that pays you, you think you're getting paid? You're not getting paid, the business is getting paid. And, you can't internalize that reality until you've got your business and personal finances separated properly. As soon as that money stopped going into my bank account and started going into the businesses' bank account, I got it. I understood, this isn't my money. But, what happens is that when you are "getting paid" every time a client pays you, every time a customer buys your class, every time someone signs up for your workshop. You think like this, this is my money, and so when you go to hire someone, when you go to pay a bill, when you go to invest in graphic design, or web design, or a conference. You're parting with your money, no one wants to part with their money. No one wants less leftover at the end of the day. Well, instead when it's the businesses' money, you make better decisions about it. Because, now you're the steward of your businesses' finances. Instead of being personally involved in every dollar that you have. Since you guys are so advanced and sophisticated and wonderful and not in the shame zone that I am, up here. (laughter) I'd love to hear from your experience what happened maybe for somebody that was co-mingling their finances and later separated them out. What was that experience like? What was your aha moment in that process? Megan.
Well, I just want to, I actually just had an aha as you were talking because I think that there's a difference between the mechanics of separating your business and personal and like the mental separating your business. Because, I've had separate bank accounts from like that was one of the first things I did when I started my business because I'm scared of the IRS so like, that was one of the first thing oh here is the personal account here is the business account. But, I think that mental separation like what you were just saying about when a client pays you know you. When a client pays, like what are you thinking about that money? And, still that mental piece of oh if I hire someone else, that's less money that's eventually getting transferred into my personal account. So, I think that is that's the difference of just like the mechanics of having separate accounts. And, the mentally committing to it's the businesses' money. Yeah, I think that's a great point because maybe in my shame zone up here. Making the switch mechanically is what also caused the mindset shift. But, yeah, I think that's a phenomenal point that if you start it that way, you still may be treating the money as your own even though those accounts are separate.
Accounts are separate Yeah That's huge, that's huge. Anybody else, kind of your reflections, personal aha moments, around separating your business and personal finances? Beryl, I saw you nodding your head some?
No, I had the exact same aha that was like oh I've had my bank accounts separate since I started this but being a solo printer first. It was like oh it's all my money. Right. And, I recognized that there were certain things that I needed to expense out because I wasn't good at them I wasn't at good at design so I could hire a designer but it still was that mental of like oh but that's less money for me at the end of the day. If I do one more thing myself, then I get to keep more of the money
Which goes back to what that Seth Godin quote yesterday right, where we end up hiring ourselves over and over and over again. The problem of course with that is that as you hire yourself over and over again; You're actually paying yourself less and less and less per hour, right? That doesn't make any sense. And, it kind of comes back to that old adage you got to spend money to make money, right? I think as a solo entrepreneur, someone who is their business, that doesn't make a lot of sense. You're like no I don't need to spend money to make money I need to spend less money then I get more money, right? The amount of money I have is finite, if I spend less of it I get more of it. Which is not a recipe for growth, right? If you want to grow your business you do have to spend money to make money. You don't have to spend money stupidly, you don't have to throw money at problems. But, when you do have that complete mental separation between personal and business finances. And, when you are stewarding your companies' money, you start to see how an expense can actually lead to greater profit down the line. We're going to get to that later on, we're going to talk about some of the very very specific ways that we can make money from expenses. And, specifically from hiring people. So, that's the first step, the second step and this kind of leads into exactly what Beryl and Megan were talking about, which is deciding on your salary. This was another huge aha moment for me. Just in the last year. Because, as much as I'd made that mental separation as soon as my finances; my business and personal finances got split. There was a whole new level of it when I started paying myself a salary. Now, I literally pay myself a salary. I'm a W-2 employee of my company. That's how we have things set-up but even if you are just, you know you've got it set-up as a sole proprietorship or even you are an LLC being taxed as a sole proprietorship. You can still pay yourself a consistent income, you can set the draw you're going to take on a monthly basis. And, when you do that, you start to see how all of this money is left over for your use. Instead of all of this money is left over for me to have a fantastic lifestyle. Ideally, those things are both true, right? But, you start to see, alright I've paid myself $5,000 for this month, I have another $5, left that I can spend on something else, something to make $7,000 next month. And, some of that $5,000 can be yours as well. We're going to get into a little bit more of the mechanics of how that works because profit, you get to equally share profit with the business. And, sometime less equally, sometimes more, we'll get into it. But, this, this piece around paying myself something consistent every month has been a huge breakthrough. Because, now I'm part of the budget. I'm not the budget, right? It's just like the separation between; I'm not my business, my business, you know I work for my business, you know I'm employee number one. The same thing happens with your finances as well. So, that you have a much clearer picture of how much you have after you pay yourself to pay others. How many of you pay yourself a salary or a consistent draw every month? Gold stars. (laughter) Have you guys considered paying yourself a consistent draw? What holds you back?
Fear that there's not really enough to do so. Okay. What else?
My expenses still outweigh my income at the moment. So, it's just not a realistic place for me to go yet. Okay, what else?
I feel like I'm still trying to figure out where I want to be investing in my business. So, a lot of, all of the money that I'm making consistently, I would like to have available to me to play with, with the systems, and the platforms and things that I need to be using. I feel like recently I've solidified a lot of those, and I feel like I can start thinking about the next step now. Which feels really good.
Yeah. So, I would encourage everyone to pay themselves something, every month. Whether that's $1,000 every month, or $500 every month, or $10,000 every month. Doesn't matter how much it is, I would recommend you pay yourself something consistently, get in the habit of having payroll as one of the expenses that you're investing in. In one of the previous lessons, we talked a little bit about how when you are hiring yourself over and over and over again, you kind of lose track of what it really costs to run the business. And, if you are paying yourself only $500 a month, or only $1,000 a month. You're still not quite there in terms of really understanding what it costs. But, you're a lot closer then if you're paying yourself nothing. And, so whatever you can feel comfortable paying yourself month after month. And, it doesn't have to mean, that sometimes all of that money is there every month, it just means it just has to work out over the course of a year. Whatever you feel comfortable paying yourself on a month by month basis, start now. Because, again that mental separation and realizing I'm, you know, I know my business is providing for me, is going to help you feel more comfortable saying I know my business can provide for you, right? And, that's one of the biggest fears I heard from people about hiring as I was preparing for this class; was alright I have the money now or you know I've set aside this amount or this is how much I'm making now. But, how do I know I'm going to be able to provide for them into the future? How do I know, like I'm making this big commitment to them, how do I know I can keep paying them? I mean, he honest answer is you don't. These things happen in business every single day at every single level. But, at the same time, the more comfortable you get with paying yourself, the more comfortable you'll get paying someone else. And, so for a simple as this, you know step 1, step 2, these are huge mindset, huge structural changes, that really prepare you for success when it comes to hiring. Now, we'll talk here in just a minute about actually what it is that you need or want to pay yourself and only you can make that decision. I'm going to give you some guidelines, I'm actually going to show you two different ways you can think about it. So, don't feel like I'm glossing over actually deciding what your salary is. But, the point here being just that I want you to pay yourself something and I want it to be consistent. I want it to be the same, month in, month out, month in, month out. If you are, and I'll just say for any of you who are taxed as an S-Corp and incorporated as an LLC, which is my situation; which a lot of small business owners as you, as your revenue increases that's the situation you find yourself in. I pay myself a salary every month, and I also take a consistent draw every month. That's just how I do it, I'm not saying that's the best way to do it but I wanted to clarify that. That draw I can put back into the business or I can take out more if necessary. But, I do have that consistent, okay here's my salary, and here's my draw. Sharon
What's the difference between those two for you?
So, structurally and I'm this is the disclaimer where I'm not an accountant or a bookkeeper, but the way I think of it is the salary is what I'm getting paid to run the company. The draw is based on the profit I get as the business owner.
Okay, yeah. And, so I won't get into the nitty gritty of the taxing there because I don't understand it. (laughter) But, there is a difference a little bit in how that money is taxed, how it passes through the corporation. But, when it comes down to why do you get paid in two different ways in that it comes down to this is the money I earn as the CEO of my company and this is the money I earn, or this is the money I create as profit, as the owner of my business. Shelly, do you have anything to add to that? Person who knows these things? So, one is a salary, like you get a paycheck and the other is based on the profit that the company's making, which is going to fluctuate if you take a monthly profit draw, then it's going to fluctuate based on your month, most people tell you to take it quarterly. And, so if you're , say you have a down month you have a very cyclical business, like if you're a wedding photographer.
Yeah. And, it's slow in the winter, you may not have a profit draw in the winter months. And, you're going to use that profit in the summer months to hold yourself over for those expenses. So you may not take your, that's why a lot of people won't take profit draws every month. If they're a very up and down business they'll hold that profit for quarter draw. Yeah, I keep a nice big savings cushion, because I like flexibility and I like consistency, like I don't like things being really up and down. It's one, to me it was one of the benefits of moving both to a subscription model and to paying myself a salary. So, I collect the money in this savings account so that I can take that consistent draw throughout the year. So, basically I'm either taking an advance or paying into what might be a more traditional quarterly.
And, you're just buffering it.
Like that methodology just really buffers the plan.
Yeah, thank you.
Could you think of it as something like a commission or a bonus?
Yeah, I wouldn't, I wouldn't, because one of the challenges that we have especially when it comes down to the finances around hiring; is that we're really used to being paid for work.
And, as a business owner, and as a business owner who works in their business you get paid for work and then you get paid as the business owner.
Right, and this is the difference between people who come from families and environments where business ownership is kind of just in their family culture, or in even in their local culture; where they understand like owning a business has it's own reward. Most of us do not come from that, right? We're used to putting in a number of hours, contributing some value and receiving compensation for that. So, when you think of it as a commission or a bonus you are getting paid based on work and I want you to get comfortable being paid to own something.
I think this really goes back to what you were talking about knowing what hat you're wearing. And, so you're, you are wearing two different hats in your business and so sometimes you're wearing a CEO hat and you get paid a salary for wearing that CEO hat and then sometimes you're wearing the owner hat and you're getting paid profit for being the owner. And, you could conceivably hire someone else to wear the CEO hat. And, then that person would earn that salary.
Exactly. And, you've kind of already budgeted it out and then you can continue to wear the owner's hat and continue to take that pay out but then you know, Susie Smith comes in as the CEO of your company and they're now getting that salary that right now you're paying yourself. That was how I had to like (multiple agreements from audience) mentally think about it.
Exactly right, yes, thank you, thank you for sharing that because that is exactly right. And, that may not be something that you aspire to at this point that you'd want to hand over the actual executive leadership of your business to someone else. But, it's a possibility, right?
But, thinking about it as a separate just like you're teaching us, like thinking about it as a separate job description. (audience members agreeing)
Exactly, exactly, and recognizing that you know we talk about exit strategies, sometimes, sometimes exit strategy is selling the business. Sometimes, exit strategy is actually shutting the business down and retiring. Another exit strategy is continuing to own the business but giving the day to day operations to someone else. And, that works great too because that means you can leave that to someone else. If you, if , when you pass on, right? That can be left in a trust, that can be left to a child, it can be left to a spouse. And, so starting to set things up like that now helps you actually start crafting the possibility of an exit strategy in the future. I mean it's not something we talk about tons in the small business world. But, it's something we should be thinking more about. Megan, I think it was you yesterday that said Am I? I'm 40, am I really going to be doing this in another 20 years, 30 years?
I did, yeah. And, that's, so that's another way that you can kind of think about that as well.