You’ve been hustling and working hard in the business, missing soccer games, barbecues, and wondering if you’re ever going to have a personal life again. Now things are going pretty well and you’re wondering if you can finally reward yourself and your family for all of your hard work.

I get it. Entrepreneurship is tough and it’s got to be worth it at some point.

There are a couple of things you’ll want to consider before giving yourself a raise.

Most of my clients are s-corps. This means that their pay comes in two forms - a reasonable salary and owner distributions. So you’ll want to evaluate whether or not you can raise either or both.

The first thing we need to ensure is that you’re paying yourself a reasonable salary for your job duties. The IRS considers a reasonable salary the amount that similar businesses would pay for the same services. So ask yourself what you would need to pay someone else to fill your role in the business. 

Most of my clients are owner-operated at first. This means they they work as a practitioner in their business. For example, they own the chiropractic clinic, but they are also a chiropractor and treat patients. Or they’re a nurse practioner and they give injections and other procedures at the medispa they own.

At first, they’ll be paying themselves what they would pay another practitioner to do the same thing. However, once they’ve grown, hired other practitioners, and expanded to multiple locations they’re typically spending significantly less time in the practice treating clients and more time on managerial duties. With that change comes justification for an increase in salary.

At the very least, review your salary for reasonableness on an annual basis. The IRS doesn’t like it when you’re not paying yourself enough through payroll. Reasonable salaries are an area they crack down on in audits. Make sure that as your business grows and your job duties change, your salary grows with it and the justification for it is documented.

Just a word of caution as you move to a managerial role - be mindful that you’re not stepping out of working in the business more quickly than your cash flow can handle. If you only have one location, unless it is a really large location with lots of treatment rooms and practitioners, it’s going to be harder for you to fully step into a managerial role and out of treating clients. The profit margin just isn’t there yet to support it.

I know everyone is telling you to stop spending so much time working in the business and more time working on it and I agree. However, the timing and cash flow have to be right.

Once you’ve determined that you’re paying yourself a reasonable salary, then you might want to increase your owner distributions. Owner distributions are the fun part of being a business owner. They’re what you get as a benefit of being the owner of the company. 

I’ve found that taking distributions quarterly is the best cadence. It gives you time to evaluate the performance of the business before you pull extra cash out.

When you’re determining the amount that you should take in owner distributions, you want to factor in both the business’s performance and free cash flow. Taking excessive distributions can create instability in your business. The business needs to be taking a profit and have enough cash flow left over to cover debt payments and ensure that you’re working toward your savings targets to build up your cash reserves. Anything leftover after that is fair game for owner distributions.

It’s always best to put numbers to your plans and project your cash flows before taking more money out of the company.

If you’d like help with determining your pay or projecting your cash flows, we’re here for it. Book a discovery call.

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