For every business, there is a break-even point, a number that the business has to exceed in order to make money. But deciding how much to pay yourself can be tricky.
In the roofing industry, it is crucial that business owners know where their break-even point is, otherwise they likely will be operating at a loss that will surely lead to the demise of their company.
But finding the break-even point isn’t easy, and consequently, it is difficult to determine how much a business owner should be compensating themselves.
“Paying yourself is not as easy as it sounds, says Dmitry Lipinskiy, owner and CEO of Roofing Insights, who urges business owners not to overpay themselves.“
“You should be paying yourself market value,”
Lipinskiy advises.
So, what is your market value?
To determine this number, Lipinskiy has developed six steps business owners can take to find out how much to pay themselves.
In no particular order, they are:
1. Figure out how much money you need to survive
During his first year in business, Lipinskiy says he was paying himself only $1,000 per week.
All other revenue was going straight back into his business.
“Be conservative. Pay yourself enough to live and never increase until you really have to,says Lipinskiy.“
This strategy will allow you to hire staff, invest in CRMs, and purchase other items that can take your business to the next level.
2. Create a job or do the job to support your revenue
Here’s what often happens:
You get too busy, and you don’t have time to handle the various aspects of your business.
When this occurs, it is incumbent upon you as a business owner to then outsource different jobs within your company.
This is a good place to be in, but many contractors jump the gun and hire employees when they don’t have enough money to pay them.
This happens because some contractors don’t want to do the work themselves. They feel it is instead easier to hire others to do a job.
This is not a bad strategy, but if you don’t have enough money to pay people for their hard work, your business will falter.
Advises Lipinskiy:
“Don’t hire a person if you don’t have enough revenue.”
It’s as simple as that.
3. Don’t hold people accountable
It can be tempting to ignore glaring issues within a company by throwing money at a problem, but unless your business is flush with capital, doing so will only further exacerbate the issue.
One example of this is when business owners hire their friends and family, and then when those people don’t perform, they still remain on staff because of their relationship with the company owner.
BAD IDEA!
Says Lipinskiy:
“If numbers are not there to support your company, then you either can’t pay yourself or your employees. You have to be accountable to your business. Treat it like it’s an independent organism that you want to be healthy, otherwise you’ll get in trouble, your business will get sick, and sooner or later, it will die.”
4. Always focus on net profit
If your business grosses $3 million per year, that doesn’t mean you made $3 million.
In fact, your net profit is actually much less.
“In the roofing business, the golden rule for net profit is ten percent,”
says Lipinskiy.
If we apply that to a company who grosses $3 million, then the net profit is only $300,000.
That’s still a lot of money, but it’s not enough to go crazy and overinvest in your business or personal life.
Unfortunately, there are too many guys in the roofing industry who pay themselves too much money, and then their business begins a downward trend.
“A lot of business owners take too much and their business has nothing to show,”
says Lipinskiy.
Our advice?
Don’t go guy that new truck just because you sold a few roofs.
Instead, reinvest that money in your busines and delay gratification so that in the future your rewards have the potential to be even greater.
5. Pay yourself from your overhead
Key point:
After deciding how much to pay yourself, you then need to subtract that money from your revenue.
Lipinskiy advises that this money be included with the cost of other expenses that are part of your overhead.
“That $1 million business should have about ten percent of overhead. The number fluctuates, but ten percent is a good rule, shares Lipinskiy.“
6. Leaders Eat Last
Simon Sinek is the author of Leaders Eat Last, a marvelous book that explains why as a business owner, you should always be the last one to get paid.
In his book, Sinek emphasizes the importance of paying vendors, employees, and anyone else before paying yourself.
This is because as an owner, you have a responsibility to the people who are helping to make your business grow.
“I cannot tell you how many times I went three or four months without paying myself,”
says Lipinskiy.
“I was supporting my team and my business. It was a good business strategy.”
Lipinskiy also mentions that other business owners need to cast aside their egos and focus entirely on their businesses.
“You’re the business owner. Stop thinking about yourself, your hustle, and how you deserve a lavish lifestyle and have to be compensated for all the stress you take on. You don’t. If you don’t have money in the business to pay your employees, you don’t have money in the business to pay yourself,”
he says.
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