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E Entrepreneurial Support

Pay yourself to grow your business

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 "Susan started a clothes making business three years ago and recently sought my advice.

The great plans she had when starting out haven’t materialized and she has continued to find herself month in month out still not having enough money or struggling to pay rent, salaries, materials etc. This is despite the fact that her client base has grown.

Susan also told me that she does not in fact pay herself and everything she makes seems to go back into the business. There are of course many dynamics to consider in Susan’s quest to grow her business. However there is one element I want to focus on in this article.

When I probed Susan a bit more about how she handles her finances I found out that the business bank account and her personal bank account are one and the same. Whenever I hear business people say the words – “I don’t pay myself” – many times it turns out that the separation of finances has not happened. This is a fundamental reason why your business will not grow.

Many people actually take pride in the perception that they are “not paying themselves”. I call it a perception because in actual fact you are paying yourself but just doing it in the wrong way and without you being aware of it. Are you renting a house, eating, transporting yourself, doing your hair, entertaining yourself? Then you are paying yourself.

Susan’s clients pay money into an account in her name. Susan uses this account to withdraw money for the personal expenses I have just mentioned. She also uses this same account to buy materials, pay her tailors and pay business rent etc. When her clients pay her in cash and she needs to buy bread and milk on the way home, she just uses that money. Susan is waiting to see a large balance at the end of the month to feel that her business is progressing and that she can pay herself.

As long as she keeps managing her affairs this way as many people in small business do, she will not be able to see any progress. This method of managing money is like trying to fill a leaking jar with water. The water can keep coming in but as long as there is a hole, it will never be full. So the hole in this case is the fact that Susan keeps removing money in a random manner for personal expenses. In business any expense that is not directly related to running the business is a personal expense. Her personal expenses are unchecked because as long as the account has money or a client has paid in cash she deems it money she can use. And as we all know there are many ways to spend money as long as it is in your hands.

Susan must start banking and recording all the money that comes into the business. Even if she is given cash it must first be banked. This way she will be able to ascertain what her business is actually making on a regular basis e.g. weekly or monthly and therefore what she can afford to spend. Just like she pays business rent, Susan MUST pay herself a standard amount from the business to cover her own expenses and this should be banked in a separate personal account. This is where you must be practical. Your business cannot be making Kes 100,000 per month and you pay yourself Kes 95,000.

When I actually did this short exercise with Susan using her lifestyle expenses she realised she was overpaying herself. Also by not paying herself a regular amount she had become indisciplined with personal spending. She would actually spend Kes 5,000 in a day because she had it in hand that day. In her mind, any money that came in was hers to spend and that is why she would struggle to pay her business obligations. When you separate business funds and personal funds you learn that it is possible for the business account to have money whilst your personal account may not have any funds. The money in the business account is set aside for business related expenses. You also get disciplined with personal spending when you have to budget based on specific weekly or monthly amounts.

You want more personal spending money, look for ways that your business will make more, hence afford to pay you more. When you believe you don’t need to pay yourself, you won’t stretch yourself and you will not grow. If you keep working towards survival you will only get survival. Say Susan’s business expenses before she pays herself are Kes 100,000. If that is the target she has in mind that is what she will work towards and that is where she will remain. She will know exactly how many outfits she needs to sell to get Kes 100,000. However if she decided to be paying herself Kes 50,000 she will work towards Kes 150,000 and not Kes 100,000. As her business makes more her personal income can keep increasing. So if you are in the same boat as Susan and wondering why there is no growth;

1) Open a business and a separate personal account. Ensure all business income is banked in the business account.

2) From today keep track of every single expenditure both business and personal

3) After now knowing what the business makes in income decide what it can afford to pay you regularly, whilst also maintaining other expenses.

ABOUT THE AUTHOR

Article shared by Centonomy courtesy of Waceke Nduati

Waceke runs a program on personal financial management. Need to connect with her? Email :This email address is being protected from spambots. You need JavaScript enabled to view it.|

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