For business owners, the question of whether to hire (or retain) an employee versus taking home more cash is a tough one. I am asked some variation of this question again and again. It’s tough, because as an entrepreneur you’re trying to grow your business, but many times this means you are sacrificing take-home pay.
In its worst form, the business owner is barely surviving, on the verge of personal bankruptcy, while the handful of employees are taking home a paycheck, oblivious to the stress and burdens the business owner is carrying. (And they wonder why the boss gets triggered so easily when something goes wrong in the business.)
Unfortunately, this scenario is far more common than people realize. And even if it’s not this extreme, it is all too common that the business owner is sacrificing take-home pay for the benefit of his or her employees.
Recently, I was talking with a customer about this dilemma. Her business is growing fast. She’s approaching a million in annual sales, the 12 employees in the company think everything’s going great, but she’s stressing out because she is not taking home enough money to be comfortable.
“What should I do?” she asks me.
First, recognize that you own the equity value of the company. That equity is worth a lot more than a few thousand dollars of take-home pay.
Second, understand that if your annual growth rate is more than your profit margin, you’ll need to finance the growth of the business through outside capital or your own (take-home pay) pocket. Or, if you don’t want to finance the fast growth with outside capital or your own pocketbook, you’ll need to slow the growth rate.
Third, don’t confuse employee payroll (a recurring expense) with business success. Many entrepreneurs love hiring people and feel that it, alone, is a sign of success. It’s only a sign of success if you can afford them.
Fourth, be very wary of financing the payroll with your take-home pay for long periods of time. We experienced this problem early on. It’s one thing to defer take-home pay for a short period of time. It’s another thing to chronically do it. We ended up letting go of a couple of employees, getting the business right so we could take home a reasonable wage, and then re-hiring.
If you keep in mind these four principles, you’ll avoid the habit of funding payroll with your take-home pay.
SBS Idea of the Day: Determine—right now—your minimum take-home salary per month for your business in its current state. Now, decide whether and for how many months you are willing to fund payroll with all or some portion of that salary. If you get past your number of months, you need to reduce payroll to make room for your salary.