What is Owner's Pay vs Profit

What is Owner’s Pay vs. Profit?

Today we’re talking about the difference between CEO pay and profit; two really important concepts in the Profit First system. 

Before we even get started, I want to share that all of these conversations that we have around money are intended with the purpose of making money, money goals, financial planning, business finance relatable, making it attainable, making these conversations judgment free, shame free, blame free, all the free. These podcast episodes are to really bring you an energetically neutral frame for talking about money.

I know that money has a tremendous emotional charge. I have certainly experienced that charge myself. I have been actively engaged in my own money mindset, in my own financial literacy for the last 15 years. At the place that I am in my journey and everything that I’ve experienced in that timeframe, it’s really led me to the place where I can show up and talk about money in a way that is emotionally and energetically neutral.

I really want you to have that place where you can come to hear money talk in a transparent way, but in the most neutral way that I can express it. I understand that a lot of what I say might not feel neutral to you, that you might feel particularly activated around something that I say. However, that is not my energy or emotion that you’re feeling, you are feeling your own energy and emotion there. That is actually really good.

I hope that some of the things that I say here “trigger” you, because that activation is going to hopefully lead you to the actions that may change in your life and that bring you closer to what you truly desire when it comes to your life, when it comes to your business, and when it comes to your money.

Before we even get started, I want to give you some reminders. 

You do not have to be perfect to make money. You don’t have to look a certain way. You don’t have to do all the things right. You don’t need to be good at math. You don’t have to sacrifice your values and the things that bring you joy. You are allowed to enjoy the process of creating money and wealth. As a reminder, we all have financial baggage, feeling shame or embarrassment won’t help you get to where you want to go.

Small businesses carry debt. That’s just a fact. 

Small business owners live paycheck-to-paycheck. That’s another fact. 

That is actually what we are talking about here today. 

Through my work with Profit First as a Profit First consultant, we are presented with a statistic that 87% of business owners live paycheck-to-paycheck. That doesn’t surprise me because I’m at this point finding it hard-pressed to find women who even pay themselves at all, forget living paycheck-to-paycheck, but who actually take money out of their business accounts and transfer it to their personal accounts for personal use.

That is something that I am struggling with. Just if we zoom this out, some of the recent data is that after all the inflation that we’re seeing, 58% of all Americans, including 30% of those earning $250,000 or more—that’s a lot of money—are living paycheck-to-paycheck according to a report put out by Lending Hub Houston. We have a cash flow problem. Whether you are earning a paycheck from somebody else or whether you are working for yourself, we have a cash flow problem.

As I mentioned on another podcast episode, about 82% of businesses fail due to poor cash flow. The reason why cash flow is so important is because that’s how you get paid. That’s how your business profits and that is ultimately how you build wealth. You need the cash from your business to invest in other cash-generating assets. We need to be paying ourselves as business owners.

What is owner’s pay versus what is profit in Profit First? 

Owner’s pay or CEO pay, that is what you are paying yourself for your lifestyle. Your CEO pay is meant to support your lifestyle as a business owner.

Think about the lifestyle goals, the financial planning that you are doing in your personal life, that is where your money goes. If you have wellness goals, if you have personal bills that need to be paid, because we’re adults, and we pay our bills, this is what the money is being used for when you take it out of your account and you put it into your account.

Now I think some of this gets tricky. We have a lot of women who have partners, spouses, or financial partners, and they may be earning more than you right now, especially if you are running your own business and you’re struggling to make sales, or you’re focusing on finding more clients and you don’t understand how to manage your cash.

You’re not going to be paying yourself as much and there’s a good chance that you have a spouse at home. I know because you tell me. That’s like, “Okay, where’s the money? This is just an expensive habit. Where’s the money? When are we going to start seeing a benefit from you having a business?” Well, you start to see a benefit when you start to pay yourself your CEO pay.

Profit First gives you parameters and percentages. 

Don’t just go and take them out of the book. You actually have to work with somebody to come up with the appropriate percentages for you, your life, and your business. But they give you percentages to base how much you can pay yourself on.

That is what we want to see every woman doing. Even if it’s just $100 a month, even if it’s $500 a month, we want to see something being attributed from your business to your lifestyle and not relying on that spouse or partner to really be the one who is providing. We want you to be able to provide for yourself for lots of reasons.

One for financial empowerment. It just feels good to be able to provide that salary for ourselves. Two, things are getting more expensive. We just said due to inflation, 50% of all Americans after inflation are living paycheck-to-paycheck, including 30% of those who are earning $250,000 or more.

Our money is just not going very far. If you think that inflation, all of a sudden, you’re going to the grocery store and groceries cost more, and then the Fed is going to bring inflation under control, and all of a sudden the groceries are going to start costing less, I hate to break it to you, that’s not actually going to happen. This inflation is not transitory, it’s not going away. The best that the Fed can do is make sure that it doesn’t go any higher than it already is. If you’re sitting here feeling pinched in waiting for this to abate, it’s not going to happen. You need another plan.

If you own a business, the best plan, the best economic play you have is to go make money and manage your money wisely.

Go make money and manage your cash flow. Go make money and put a cash flow system in place now, not later. It’s not going to get any better. It’s now. That is how you’re going to start to build that financial empowerment and really be that financial powerhouse that I know you all want to be.

Another really interesting statistic that I came across in some research done by UBS: 51% of married women defer their financial decisions to their partners. We need to change that. I’m not okay with that. I get it because I was that person in 2014. But I’m not cool with that number. That number needs to come way down.

Also, God forbid something happens to your partner, nobody likes to talk about this, this is horrible to think about, we don’t want to think about this, but what happens if something happens to your partner? Because I have experienced this in my community at least three or four times in the last probably two or three years and I have to tell you something, it’s ugly. It’s ugly, especially if your partner doesn’t have life insurance.

If they don’t have life insurance, that is the first order of business today is to go ask them if they have life insurance. If it’s a no, they are going to get life insurance. Because what has happened—and I’ve seen with women who stay at home, work from home, work to support the family, and aren’t compensated for that because that’s apparently not something we do in this country, we minimize the work that women do everywhere, including at home—but we have women who are staying home raising kids and taking care of the family for years, 5 plus, 10 plus years and then something happens to their partner, and they didn’t have life insurance.

I know two women now who are on government assistance. They went from living a multiple six figure lifestyle to broke and living on government assistance because they cannot find a job in the middle of a life crisis happening. It’s just not feasible. You don’t all of a sudden go from not working—I’m banging my drum here, folks. I’m sorry—we don’t all of a sudden go from not working for 10 years to in the middle of having your partner die and having to take care of kids, to running out and finding a job that’s going to manage to support you, that’s not how this works. That’s an emotionally traumatizing event that requires healing.

Even still, it’s going to take you a little while to get your skill set back up and all those things. Now I realize I’m not probably talking to a lot of stay at home moms on this podcast. I’m talking to women small-business owners, but you need to check the hell in, can the money you’re taking out of your business cover your expenses if something happens to your partner, especially if they don’t have life insurance? Are you going to be able to provide for yourselves?

Because that’s really what I really want. I want everybody, every woman who is listening to this podcast and running a business to be thinking about “How does my business provide for me on an everyday basis, but particularly in case of an emergency?” We have to stop with the manifesting, going to the seashore, looking through everything through rose-colored glasses, and living in this life where we don’t address reality. That is what your owner’s pay is for, that is what your CEO pay is for, it is to address reality at a minimum.

At a maximum, let’s provide for that luxury lifestyle and the things that you want that are beyond your basics. How do we provide for your basics? How do we provide for the things that really make you thrive and feel good? You can even have another category of things that are maybe an upgrade from your thrive list, let’s call it thriving up. That is what your CEO pay is there for. Rant over temporarily. Coming back down.

Let’s talk about profit. Why do we need to profit? 

Now, profit in Profit First is a little different than profit the way you might hear about it in the world. Profit in the way that you might see it out in the world is sales minus expenses equals profit. When you hear people talking about them making 50% profit, which in a service-based business is true, like you should be able to overall profit that way, but it’s when you minus expenses and taxes from your sales, that’s a little different than the way we think about it in Profit First because we’re actually double dipping when it comes to paying you first.

All the monies coming into your business, remember we talked about revenue, all your monies coming to your business, and in Profit First, you would have a profit, you would have an income account, a revenue account that all the money comes in. It’s coming in from PayPal, it’s coming in from Stripe, it’s coming in same based on checks anymore, it’s coming in through checks, whatever it is, and it goes into this revenue account.

The first thing you do when your money comes in is you are going to take a small percentage and put that in a profit account. That’s why it’s called Profit First, we’re not leaving profit to the end. We’re not leaving profit because we all default to we have to pay our bills, that’s how we’ve been conditioned. We have to pay our expenses. What happens is our expenses grow and grow and grow because we think that these are all the things that we need to do to run a business and then nothing ever gets leftover at the end for the business owner.

In Profit First, we’re taking a small percentage aside, and we’re putting it away from Profit First. The second thing that you do is put your money into your owner’s pay bank account. You take your money, you put it in a profit account, you put it in a CEO pay account. The third thing you do is you put it in a tax account. The fourth thing you do is you put it in an expense account and the expenses get paid last.

So if the CEO pay is for your lifestyle, what in the world is the profit for? 

This little set aside for profit is brilliant. It is brilliant, because what it allows you to do is a few things: if you currently have debt on your business, honestly, even personally, this is what you’re going to use to pay off that debt. I have clients who have paid off debt so frickin fast, because we first set aside the debt repayment.

I’ve had people pay off $60,000 worth of debt in less than a year by putting their profit first. If you have to pay down debt, the first thing you’re going to do is that’s what you’re going to use your profit for. If you don’t have any debt to pay off, you’re going to have your profit accumulating in that account for the entire quarter.

At the end of the quarter, you are going to take half of that profit and put it into account for a cash cushion, like a rainy day fund or an emergency fund, anything like that. Then you’re going to take half of it and you’re going to reward yourself for the effort and the energy that you put into running your business.

Well, what does that reward look like? Well, it could look like anything. It could look like taking a vacation, it could look like improvements on your home. For me, I’ve been really hammering my investments because I want to take the cash out of my business and put them into other cash-generating assets so they can accumulate wealth and build and grow over time without me having to work for it. It’s true passive income when you do that. My profit account is used to invest in passive income. You can use it to invest in property, you can use it to invest in other things.

But the smartest thing that I think personally is to use a portion of your profit to generate more cash for yourself that you don’t have to work for. Because we’re so obsessed in this country with earned income, income that you have to work for. But what about the income that you don’t have to work for coming in from your investments or some real estate or maybe you have to work for your real estate more than you would if you just put it into a strict investment account or something like that? I take all my profit and I put it into a dividend portfolio that I’m building because dividends pay you income.

I like income investing. My goal is to get to the point where a handful of years, maybe 10 years, my dividend portfolio is really paying me on a monthly basis the amount of money that I need to live, to retire, to potentially be work optional. It takes some time, it takes a strategy, and it takes some patience, but that’s going to be well worth it for me that I don’t have to be working anymore for my money. 

That’s the difference between CEO pay and owner’s pay. That’s to pay you for your everyday lifestyle. Profit is for the reward of the effort and the energy that you put in.

Here’s why I love that sitting in a profit account. I’ve done this myself and I know you have too, you make a sale and you go, “Oh my gosh, I’m going to go reward myself for making this sale,” and you go and buy something and then the sale doesn’t come through, the contract winds up not getting signed. You celebrated too soon. You’re like, “Oh crap, I just spent all this money on something to celebrate. It wound up not coming through,” that just feels like the worst thing ever.

Or what I hear people saying is let’s say you wanted to buy. I bought a Chanel bag this year, last year, I don’t remember. It’s like $2,000. It’s the most expensive single item thing that I bought that felt totally frivolous but wound up not being in the end. One, because I love the bag, and two, because it stretched me into a different level of receiving and wealth consciousness.

But here’s what I see happen a lot. I want a $2,000 Chanel bag. I’m going to sell $2,000 in services and that is going to buy me my Chanel bag, except that’s not how that works. Because that $2,000 that you receive for the service needs to go through the whole Profit Firs system. Taxes need to come out of that. Expenses need to come out of that. Your everyday lifestyle needs to get paid for through that.

Really, it’s the profit that would go toward purchasing that Chanel bag, and it might take you six sales to get to the point where you have that $2,000. But then when you have that $2,000 at the end of the quarter, you know you’re good and clear to go and spend that completely freely because everything else has been handled. That’s the beauty of that profit account.

I hope that you found this episode helpful in distinguishing between CEO pay and profit, why you want both, why they’re so important, how that winds up translating into really helping you create more wealth in your life, even more joy and luxury, and ability to buy the things that maybe you want to treat yourself with.

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