How Much Should You Pay Yourself?

Money

As a professional fractional CFO and managing director of financial planning and business analytics firm AnalytIQ, for a living I tell people how much to pay themselves. Who am I to be so bold? Well, first and foremost I have spent nearly 20 years as a financial analyst and spent most of my professional time getting to know what makes companies work (and by the same token, fail) and how come some earnest and hardworking individuals reap enormous financial awards and why others can’t even break even. And I’ve worked in just about every industry you could name, and every size you can think of. A small company has just as much potential to be successful as its larger, global competitor. I’ve worked with companies in industries ranging from SaaS and e-commerce to coaching, retail, and publishing.

One SaaS company I worked with, we started at Series C with about $9MM in sales and 3 years later we were doing over $100 MM in sales. The last raise for the company was an exit round at over $240 MM. A coaching business I started working with in its first two years did approximately $24K in year 1 and $240K in year 2. After they became our client , YoY growth in year 1 was over 300%, and it had a CAGR of 130% since I managed its finances. The owner is now in the process of achieving an exit of the business.

An engraving, gift e-commerce business was struggling with sales and profitability. Through a review of their financials and operations I devised a business plan for it in order to achieve its highest sales months in the last year. My company also implemented CRM, new sales processes, and BI tools to improve its visibility. We are projecting its first quarter this year will be their most profitable quarter ever. Expectations are that the company will achieve record sales this year.

Another SaaS client that hired us was on the verge of bankruptcy with a high burn rate and poor payment history with clients. I negotiated new purchase order items for the organization to improve cash flow. We also developed a pitch deck for a $2MM raise that is currently being negotiated. We implemented cost-cutting, and now sales forecast improvements have allowed the company to achieve a 500% growth rate in 2019.

Here’s how I drive my clients to success:

  • First I like to review their cashflow projections along with their sales projections to review velocity of the business
  • From there I have an honest conversation with the owner about what his/her personal finance needs are

Being a founder is a tough business and is a stressful enough process on its own much less when one has to worry about living expenses. Ideally, the founder should pay himself a living wage after two things have been established:

  1. A business model has been put into effect and tested normally via a seed round or higher (during a pre-seed stage or a stage where you’re trying to figure out if the business model is going to work the owner should pay themselves very little or nothing at all)
  2. 3-6 months of reserves have been met the owner can take a living wage

Let’s assume those items have been met and that the owner says he needs $7,500 a month to live comfortably and he resides in California. Let’s also make the assumption the owner is doing either development, sales, ops or marketing or often times a little bit of everything.

  • To make $7,500 a month net as an employee in California the company will have to pay the founder $10K a month (this assumes tax deductions of about $2,430 a month) + an estimated $800 in employer taxes.
  • Although this may sound high, if the founder is also working in sales and the MRR or monthly revenue for the company is about $100K, this accounts for slightly more than 10% of sales.
    Normally the sales expense for a sales rep can account for 16-30% of bookings/sales (commissions + salary + travel etc.)
  • This means you’re getting the productivity of a sales rep and a strategic leader for the bargain price of 10% of sales.

Although every situation is different and it all depends on how many founders are involved, along with their roles, I’ve seen salaries as low as 0% to 10-20% of sales. It may sound like a good idea to sacrifice yourself for the betterment of the company, but in the end you’re really hurting the company by not taking the right wage from the beginning. As the company scales and grows, the percent of sales the founder’s wages account for will begin to decline and be more aligned with industry averages.


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