When Should You Give Yourself a Paycheck?

Last Updated Jun 3, 2011 6:56 PM EDT

The Question: My business is finally starting to bring in some solid revenue. How do I determine how much/often to pay myself versus reinvesting money back into the business? -- Pamela, Wisconsin

The following answers are provided by the Young Entrepreneur Council. Founded by Scott Gerber, the Y.E.C. is a nonprofit organization that provides young entrepreneurs with access to tools, mentorship, community and educational resources that support each stage of their business's development and growth.
1. Pay yourself SOMETHING from day one
There's something incredibly satisfying about being able to pay yourself because of a business you started. Work it into your business plan, even if it's just $5 to buy a coffee each week. This also alleviates risk to a certain degree, as you will have profited even if the business fails for some reason. -- Colin Wright, Ebookling
2. What do you want out of the business?
Is the business intended to give you cash every month or are you trying to parlay your profits into a multimillion-dollar company that requires a lot more infrastructure? Are you working full time or part time? If you're working on your business full time, it's essential that you pay yourself because running your own business and not being able to pay your bills isn't fun. -- Adam Gilbert, My Body Tutor
3. Decide what you need to live on for the next six months
Figure out how much money you need to make each month to get by for the next six months. For some that will be higher than others. Pay yourself that amount each month for the next six months while putting everything else back in the company. At the end of that time reevaluate and give yourself a bonus if you feel it's prudent. -- Sean Ogle, Location 180, LLC
4. A simple formula for paying yourself
But, a surefire way to get burnt out on business is to never see the "reward" from it. So, once your biz starts making profits, take a % and hold it back for "reserves" or reinvestment until you have a solid cushion (for my first 7 figure biz we took 50%-75% of profits the first year for reserves/reinvestment). Then treat yourself to the "reward" and pay yourself. -- Trevor Mauch, Automize
5. Pay yourself enough for ramen noodles -- and nothing more
Take only what you need from the business and nothing more. Focus on growing revenue for the business without thinking about how it gets back into your personal bank account. This doesn't mean that you should reinvest every cent back into your business, what it means is that you shouldn't take money OUT of the business until necessary. This way, it's always in the business for reinvestment. -- Todd Garland, BuySellAds.com
6. You're working for equity, not salary
Pay yourself the least amount possible and put the rest in the business. The most financially attractive thing about being an entrepreneur is your equity. Your risk is going to be rewarded in equity, not salary. If your goal is just to earn a living, then pay yourself all the salary you want. But if your goal is to grow your business, that's where the cash needs to go. -- Luke Burgis, ActivPrayer
7. Do the math
Congrats. The next question to ask is - "Is my business cash positive?", sit down and crunch the numbers from marketing expenses, travel, shows, inventory projections, and current debts. Take this number and your sales numbers and see what you have left. Pick a base salary and work back from here, invest back the rest into the business and give yourself bonuses each quarter. -- Jerry Piscitelli, Portopong LLC
8. Show yourself the money, just not too much
Deciding how much to pay yourself versus reinvesting in your business is no algebraic equation. Sorry, but a single solution set does not exist. Instead, a healthy balance of business objectives (short+long), current business phase, risk tolerance, and more is required. Though no magic bullet exists, here's a golden rule: show me (yourself) the money, but not too much. Moderation matters most. -- Matt Gartland, Gartland Studios LLC
9. It's all about cash
If you know what's coming in and what's going out for the next several months you can determine your salary and reinvestment based on the bigger picture of your business. It's good habit to try and pay yourself consistently. Then, if you don't think you'll have enough to cover that amount you know you have to hustle and get your clients to pay up! -- Natalie MacNeil, She Takes on the World
10. Review industry standards and talk to your accountant
Review trade publications to familarize yourself with what standard compensation is in your industry based on your position and responsibilities relevant to the size of your business. Consult your accountant about the tax consequences of paying yourself absent a solid history of revenue. Paying yourself now only to use those same funds to reinvest in your business in 6 months is poor planning. -- Lauren Maillian Bias, Luxury Market Branding