“Why am I making money but not keeping it?”
That’s a common question that busy owners ask, wondering why they’re working so hard and not seeing the dollars in their bank account. After payroll, rent and all the overhead plus materials, there’s not a whole lot left over. So, where does that leave the owner? In some cases, the answer is – unpaid. There are two competing realities when addressing owner’s pay, says Jim Huston, president of J.R. Huston Consulting. “First is federal tax code and its regulations, and second is market reality and the need to be competitive in an open market,” he says.
Huston says, “I tell clients that my job is to help them make as much money as possible. Their CPA’s job is to make it look like they’re going broke and keep them out of jail.”
Ultimately, owners need to get paid just as they would compensate a general manager of their businesses. Consider what you’d pay someone else to perform your function, Huston says.
The company bank account can’t act as the owner’s piggy bank – and yet, an owner needs to be paid fairly for the time and resources he or she dedicates to the business. “Do not try to pay yourself minimum wage and think you’ll get away with it,” says Mark Black, owner of Country Club Lawn and Tree Specialists in South Roxana, Illinois. (His accountant told him this could certainly throw up a red flag to the IRS.)
So what’s the happy medium between taking fair compensation for the work you put into your operation and making good with Uncle Sam? Huston and owners we spoke with share how they take their fair share from the pot.
A fair share.
Jeff Bowen is like most owners who remember their first year in business – for him, that was 24 years ago. “I am not sure I collected a big paycheck every week consistently,” he says. (Some weeks, he went without.)
“By the second year in business, we were much more efficient with our accounting and I tried to take a paycheck every pay period.”
Bowen and his wife own Images of Green in Stuart, Florida. They decided on taking 5 percent of the gross revenue as owner’s salary.
He admits, the number was really quite arbitrary, based on the bare minimum his family needed to manage household expenses and not much more.
Now that the business’ revenues are in the $1.5 million range, he takes 10 percent and his wife takes a nominal amount as compensation for her payroll duties. “I’m a hands-on guy, so I’m selling; I’m in production; I’m involved with the administrative part of the business in the office every day,” he says.
“I call myself an owner, but I act more like a general manager because that’s what I do. I’m doing all of the big-picture things like keeping focus on goals, setting expectations for the future and a whole lot more.”
Bowen will draw a salary slightly less than 10 percent of gross income this year because the numbers are slightly below what he anticipated – though cleanup from Hurricane Irma will definitely change that picture.
“It’s so easy to go to the ‘wishing well’ and pull out what you want, but you have to pay attention to that monthly P&L.” Mark Black, owner, Country Club Lawn and Tree Specialists
He expects his pay will amount to $128,000 this year. His advice: “You can run a business, but if you can’t pay your personal expenses, then the business may not be doing what you want it to do.”
Know your numbers.
Black and his partner, Matt Brooks, are 50/50 partners in his business, and they take equal pay and distribution. They also considered how they’d pay a manager to do their jobs. However, “You have a wide range there,” Black says.
Black and Brooks pay themselves a modest salary. The quarterly distributions they take are to pay taxes. “Yeah, I’m taking a distribution out of the business, but I’m sending it right to Uncle Sam,” Black says.
He says they do not pull out any distributions from the company’s profit during the year. “We wait until the end of the year and make sure we reinvest a minimum of a month and a half of payroll back into the business,” Black says.
By doing so, the business has payroll covered in January and part of February, before lawn care renewals come in. The money set aside acts as a safety net.
After reserving those dollars, paying taxes and accounting for upcoming purchases – a new truck, equipment – Black can see what profit is left in the business. “From there, we look at that balance and say, ‘Can we take back from our business?’” It depends on what’s going on that year.
“Some people use their business as a personal piggy bank, and that’s the last thing we do,” Black says.
“A lot of owners cannot disseminate between personal and business, and that is where they get into trouble. It’s so easy to go to the ‘wishing well’ and pull out what you want, but you have to pay attention to that monthly P&L.”
Owner’s salary benchmarks.
Huston benchmarks owner’s pay by estimating a budget for three categories: 1) field pay, 2) general and administrative overhead salary and 3) dividends (determined by the owner and CPA).
Field pay factors in activities like designing, supervision and work performed on the job.
Owner’s G&A salary is for the time spent running the company. Ask yourself: What would you pay someone else to run your business?
“Dividends are determined by the tax code and profitability of the business,” Huston says.
The figures here do not include benefits like medical insurance or vehicle expenses. And, while realistic, the numbers will vary depending on the company and its profitability.
$300,000 in sales: If your business is in this arena, here are some figures to consider.
- Fair market value for your work in the field with crews: $32,400 ($18/hour)
- Total G&A overhead salaries for the business: $36,000 (this includes owner + other admin)
- Owner’s G&A salary: $27,000 ($36,000 - $9,000 for a part-time office person)
- Dividends based on profitability: $15,000 (the company makes 10 percent year-end net profit in dividends and the owner takes half.)
- Total owner’s salary: $74,400, which is 24.8 percent of total sales
Next, Huston applies the same calculations to a business that does $1 million in sales
- Owner works 0 hours in the field
- Total G&A overhead salaries: $120,000 for all salaries
- Owner’s G&A salary: $78,400 (minus the full-time manager making $41,600)
- Dividends based on profitability: Year-end 10 percent net profit and 50 percent payout is $50,000
- Total owner’s salary: $128,000, which is 12.8 percent of total sales
Going back to the question many owners bring to the budgeting table – “Why am I making money but not keeping it?” – these benchmarks provide a guideline for figuring a fair owner’s salary rather than rolling the dice or treating the business bank account like the proverbial piggy bank.
There isn’t a magic number when determining the owner’s salary, Huston says.
But these guidelines will get you on track to get paid fairly. As Andrew McCurry of Father Nature Landscapes in Birmingham, Alabama, says, “Financial health is extremely important. If I treat the business well, it will treat me well.”