One of the biggest challenges for business owners is determining how much to pay themselves. Often, entrepreneurs reinvest their earnings back into the business, neglecting to take a salary that reflects their hard work. But paying yourself isn’t just about rewarding your efforts—it’s essential for sustainable growth and financial health. The Profit First system can help you establish a consistent, fair wage that supports your finances and business goals.
Here’s a step-by-step guide to using Profit First to set your wage.
Step 1: Understand the Profit First System
Profit First, created by Mike Michalowicz, is a cash management system that flips traditional accounting. Instead of the typical formula:
Copy codeRevenue – Expenses = Profit
Profit First encourages you to prioritize profit by following this formula:
Copy codeRevenue – Profit = Expenses
By paying yourself first, you’re not leaving your income up to chance. This system ensures you are compensated for your efforts while keeping the business on track financially.
Step 2: Set Up Profit First Accounts
The first practical step is to divide your income into different bank accounts, each serving a specific purpose:
- Income Account: Where all revenue is deposited.
- Profit Account: The portion of your income reserved for profit.
- Owner’s Pay Account: The portion allocated to your salary.
- Taxes Account: This is for setting aside taxes, so you’re not surprised later.
- Operating Expenses Account: For the business’s day-to-day costs.
By segregating your money into these accounts, you ensure that you’re not overspending in any one area and that you’re able to pay yourself consistently.
Step 3: Determine Your Percentages
Profit First relies on Target Allocation Percentages (TAPs), which guide how much of your revenue should go into each account. To set your wage, focus on the Owner’s Pay TAP. These percentages will vary based on the size and profitability of your business, but here’s a rough starting point:
- Owner’s Pay: 20-35%
- Profit: 5-10%
- Taxes: 15-20%
- Operating Expenses: 30-40%
You can adjust these percentages based on your business’s current situation, but the key is sticking to a formula that allows for business growth and personal compensation.
Step 4: Calculate Your Owner’s Pay
Now that you’ve allocated a percentage of your revenue to Owner’s Pay, it’s time to calculate what that means in real dollars.
For example, if your business generates $100,000 in revenue, and you’ve set your Owner’s Pay percentage at 25%, you’ll pay yourself $25,000. This ensures that your salary is based on your business’s performance and is sustainable over time.
Step 5: Adjust as Your Business Grows
Your business isn’t static, and neither should your wage be. Adjust your Owner’s Pay percentage as your revenue increases to reflect your business’s growth. This allows you to reward yourself appropriately while maintaining your business’s financial health.
Conversely, you might need to scale back if your business has a tough quarter. The key is consistently using the Profit First system to balance personal and business finances.
Step 6: Prioritize Profit Without Sacrificing Growth
Setting your wage is more than just personal income; it’s about building a sustainable, profitable business. With Profit First, you ensure your business always moves toward profitability while rewarding yourself for your hard work. This system also builds discipline, ensuring your finances are not neglected in favor of endless reinvestment into the business.
Adhering to the Profit First model can help you set a reliable wage and create a more stable and successful business.