Are you Paying Yourself for the Risks You Take as an Owner of a Business? Let’s Find Out
What is/was your big ‘why’ for starting your business?
If you are like many entrepreneurs, the following desires were highly motivational:
- Searching for freedom from the 9-5 salary slog
- Wanting to prove that you could start and grow a business
- Having an idea that would improve or make a difference
- Doing something better or different than what was out there
Often the motivation to start the business needs to evolve into a NEW ‘Why’ to keep taking the risks involved in continuing to grow the business.
Yes, it’s time for you to evaluate the Risk vs Reward ‘Why’ to keep working on (not in) your business.
You do want a return on investment from this adventure do you not? Beyond making a difference, reporting to no one, and coming up with all the good ideas and the cash to power the goals.
It’s time for some financial essentials so you know how to earn that return AND build on the return… this is wealth accumulation and preservation at work.
1. The Purpose of Paying Your Salary
The salary you earn is what the company pays you to do the functional job the company needs. If you weren’t doing it, you’d hire someone at market salary to do it. If you carry more than one role hat, then you might need to assess how much time each month you spend on each job, and apportion your salary accordingly at the market rate for each. Take a moment and assess where you spend your time. It is worth it.
How to accumulate some wealth from Salary?
Save a portion every month. Make it automatic. Get it out of your chequing account and into a Savings account. Save up and invest it outside your business into something that comes with far less risk. Even if it’s just 10%. It builds up. Compounds. You need that for ROI!
Now you are doing 2 things well:
- Wealth accumulation
- Risk diversification
2. The Purpose of Paying a Dividend
A salary is great. You got one when you worked for someone else and they carried the burden of making payroll each month.
But when do you get the reward for taking the risks of being the business owner, carrying the stress of payroll and finding the next bottleneck and solution that will unlock the team and the market, so all your actions (not just plans) move the business forward?
You get paid for taking that risk when you issue a dividend to shareholders… that’s the company awarding you some cash leftover from net profit.
Net Profit is shown on your year-end income statement. It is what is left after the company pays for the cost of goods or services, and the fixed costs of running the business, and the taxes.
The amount left over can be split in several ways.
- It all gets reinvested into the business to pay for next year’s growth. No reward or ROI for the owners.
- It all goes to dividends. No extra cash for growth for the business unless you borrow or get new investors.
- It can be split between dividends and growth capital. Now the owners receive ROI for taking the risk and the company has some capital to spend on growth initiatives.
3. Be intentional about your Risk vs Return Goals.
Two times a year you need to discuss, weigh and make this choice to enable that dividend to be paid at year end.
At the start of the financial year and at the end when you receive the company’s income statement from the accountant or CFO.
Otherwise, you get option 1. All money is reinvested into the business. No ROI for your risk.
At the beginning of your financial year, set your intentions for dividends as one of your goals.
Then manage your KPIs all year to ensure the company has the cash to pay the dividend amount at year end.
When you personally receive your dividend check, take the following steps:
How to accumulate some wealth from Dividends?
Save a large portion of that dividend check. Get it out of your chequing account and into a Savings account. Save up and invest it outside your business into something that comes with far less risk with a reliable interest rate or return.
Now you are doing 4 things well:
- Wealth accumulation from salary savings.
- Wealth accumulation from dividend savings.
- Wealth accumulation from other investments.
- Risk diversification away from your business.
Compounding lowers your risk of earning any ROI from being a business owner.
If you want to learn how to get this formula right, create the kind of KPIs that will reliably give you a dividend check so you keep getting paid for taking the risk, then you will want our workshop on this topic. Ask us at This email address is being protected from spambots. You need JavaScript enabled to view it..
It is a richly rewarding investment for you and your business.
