Owner Pay Versus Business Money
Part B: Understand the Money
Say you run a small electrical company and the account looks healthy on Monday. By Friday it is nearly empty, and you cannot say where it went. Some of it was materials and some was payroll, and some of it was the family vacation deposit, a truck payment on your own pickup and groceries, all paid from the same card.
We see this a lot with owner-operators. When the business account and the household run out of one pot, you cannot tell how the business is really doing, and you cannot tell what you are really earning.
Two different questions
Pulling two things apart makes everything easier. One question is what the business makes. The other is what you are paid for working in it. Many new owners treat them as one thing and call it “what I make.”
Business money is what the company brings in and what it owes: customer payments, supplier bills, payroll, rent, advertising, insurance, and the cushion that keeps it alive. Owner pay is the amount that leaves the business and becomes yours, on purpose, on a schedule.
Why does that matter? Because you do work in your business, and that work has a value. If you are the one running crews, answering estimates and fixing problems, and the business shows a profit only because you paid yourself nothing, the business is not really profitable. Your time is subsidizing it. As I say often, our time is our life. If you are not paying for it, who is?
A simple test is to ask: if I hired someone to do exactly what I do, what would the business have left over? Whatever remains after that person is paid is what the business itself earns.
Paying yourself on a rhythm
Here is a way to think about it that works for small owners. Decide on a planned amount you will take, decide on how often, and transfer it from the business account to your personal account on that schedule. The exact method, whether a regular salary or an owner draw, depends on how your business is set up, so use the pay or owner-draw method you have established with your accountant. The rest stays in the business. Whatever you take, remember that profit may be taxed whether or not you pulled it out, so ask your accountant how much to set aside.
A made-up example. Say a business takes in $10,000 in a month. After materials, crew, and overhead, $2,000 is left. If the owner takes all of it, the business has nothing to absorb a late payment or a repair. If the owner takes a fixed $1,500 and leaves $500 behind, the business stays a little stronger every month, and the owner knows what to expect.
What amount should you pick? Start from your real personal costs: housing, food, insurance, debts, everything you actually need in a month. That is your floor. Then compare it to what the business can consistently support. If there is a gap between the two, you have found something more useful than a feeling: a number that says pricing, costs or volume needs work. Ideas for that appear in Gross Margin Versus Net Margin.
A steady owner paycheck also helps in the slow months. If the business is up one month and down the next, a fixed pay amount smooths the personal side while the business holds the ups and downs, which connects to Seasonality and Surviving the Slow Months.
Professional checkpoint: How an owner can be paid, and how that pay is taxed, depends on how your business is set up and where you are. Ask a qualified accountant in your area what options your setup allows, how each one is treated for tax purposes, and what you should be setting aside as you go.
Keeping the wall between them
Some habits keep the line clear. Open a business bank account and a business card if you have not. Pay personal costs only from your own account. When you need money, move it over as pay, so there is a record. If you ever put your own money into the business, or take extra out, write it down and be honest about what it was.
The point of all this is being able to look at the business and know the truth about it.
Add up what you actually need to live on each month, then write next to it what the business paid you over the last three months. If you cannot say what the business paid you, because the money moved around informally, that is your answer about where to start. Choose a number, choose a day, and make the first transfer.
An hour or two to work out your numbers and set up a separate account, and perhaps another hour with your bookkeeper or accountant if you have one. Opening a business account is usually free or low cost, though fees vary by bank.
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