The summer sales season has come to an end, and now you are left wondering how you will pay the bills when the housing market comes to a standstill.
Luckily, with a solid financial system in place, you and your real estate business will never have to worry about how you will keep a consistent paycheck while running things as usual.
Gone are the days when you paid everyone but yourself and had to support your life with credit cards and loans from the in-laws. Remember, your business is supposed to serve you; you are not in service to your business! No more leftovers for you!
The Owner’s Comp Account
In order to have a consistent cash flow, you must first start by reserving that money from the beginning. Through the Profit First financial planning system, we work with clients to establish five core accounts for their business: Income, Profit, Owner’s Compensation, Tax, and Operating Expenses. In this article, we will work to understand the importance of the Owner’s Comp account (Looking for more Profit First tips?! Head over to our blog!).
Each of these accounts will have a dedicated allocation percentage in order to ensure enough money is reserved for their respective purposes. The Owner’s Comp account is no exception!
Owner’s Comp is the amount you (and any of your other business partners) take in pay for the work you do. You are known as an “owner-operator,” meaning you own the business (have equity) and you operate the business (work as an employee for the company). Owner’s Comp is the money we reserve for you and any of the other owner-operators of the business to get paid for the work you do for the company. Your salary should be on par with the going rate for the work you do – in other words, the salary you would have to pay for your replacement!
Set Allocation Percentages
When deciding what allocation percentage to assign to your Owner’s Comp account, take a realistic look at the work you do. For instance, if you have a small company (let’s say five employees), you may call yourself the CEO, but that’s just the title on your business card. It’s likely that you are doing a lot of other work. You probably spend a lot of time selling homes, completing projects, handling client communications, etc. In reality, around 2% of your time is spent actually doing the job of CEO (such as vision planning).
Determine your salary based on what you are doing 80% of the time and what you would reasonably pay employees to do those jobs. Then, evaluate pay for all of the other owners who work within the business.
Once you have determined the salaries for all owners, add up the salaries that represent your Owner’s Comp draw. The percentage of revenue that you set as your Owner’s Comp allocation must, at a minimum, cover Owners Comp draw. Make the percentage 1 1/4 times the amount you determine for your salaries, so you can adjust for revenue fluctuations.
Through this simple process, you will instantly create a reserve of cash readily available for you during your slowest seasons!
Don’t Underpay Your Most Important Employee!
When going through this process, remember one thing: don’t cut your salary to make the numbers work. The goal of every business is health, and that is achieved through efficiency and proper financial planning. You went into business so your business can serve YOU – not the other way around!
Ready to ditch the feast or famine trend of owning a business?! Schedule your free consultation today!