What % do you pay yourself?

[Magiccity726]

About to begin my 2nd year of business and I haven't masteted this business yet obviously. How do you go about paying yourself? Currently, I have no employees. 

[AngryChris]

I pay myself monthly.  Since my largest bills (credit card with 80% of my expenses, loan, etc..) come around the 1st of the month, I know by the end of the month how much cash I'll have left over.  So... let's say I have $8,000 in the bank and I have a $4,000 credit card bill due in 1 week and a $500 loan payment... I know I can pay myself $1,500.

That's literally all there is to it.  As the owner of a sole proprietorship or an LLC/LLP, you are the "owner" and not the "employee."  Therefore, you can only pay yourself based off of profits.  Technically, due to depreciation and vehicle mileage deduction (if you use it), your tax return may show a different number than what you actually profited (in terms of liquid cash) for the year.  For example, if you profited $20,000, including $8,000 worth of vehicle expenses (that you actually paid), you could technically pay yourself $20,000 for the year (however you want, whenever you can afford it).  However, if you had also driven 25,000 miles that year and you chose to deduct about $13,750 worth of mileage deduction (55 cents per mile), which is a difference of $5,750 from the $8,000 you actually paid, your profit on your taxes would show about $14,250 instead of $20,000.  Depreciation can also cause your tax report to look off.

All I'm getting at here is that you shouldn't worry about how to pay yourself.. you simply write a check from the business to yourself.  As the operator, you need to decide how much you can pay yourself and when.  Assuming you could afford it, you could pay yourself a regular salary every week, or you could pay yourself an hourly rate, or whatever else you want.  The thing is that there is no payroll for you as everything will be done on your taxes.  You are responsible for sending estimated tax money to the IRS/state/local.  You can pay yourself any day of the week.

In short, to answer your question, I pay myself whatever I can.  I live on a budget so.. for the time being, I am paying myself less than 2k each month.  Some months I can afford more, some months I can afford less.  I make sure to save up cash when I'm doing well and to tighten my belt when I have a lot of expenses.  A percentage doesn't really apply and it's a waste of time UNLESS your business is a corporation.  In that case, you would be an employee of the company and you would have to pay yourself some sort of wage or salary.  I don't recommend becoming a corporation unless you are large enough to at least pay for one employee.  Even then, I feel an LLC combined with a good umbrella insurance policy is the way to go... that's my opinion though.

[AZVendor]

When in business you should always pay yourself first.  The amount depends on how much profit you have each month.  In my heyday my overhead was so large with equipment payments, rent, truck payments, payroll, location commissions and taxes that I could only pay myself $500 per week even though we did $1M per year.  That tells you how poorly the margins can be in a competitive market but it says more about the effect of overhead and expenses on a larger business.

[AngryChris]

10 hours ago, AZVendor said:

When in business you should always pay yourself first.  The amount depends on how much profit you have each month.  In my heyday my overhead was so large with equipment payments, rent, truck payments, payroll, location commissions and taxes that I could only pay myself $500 per week even though we did $1M per year.  That tells you how poorly the margins can be in a competitive market but it says more about the effect of overhead and expenses on a larger business.

Speaking of which... I have crunched numbers many times.  I'm sure every business and every scenario is different as there are far too many variables for a one-size-fits-all conclusion, but I have concluded that I find the most comfortable, profitable, gratifying way to run my business is to keep it as a one-person one-route operation.   My goal is to be able to pay myself 50k/year eventually and I can see that happening as a one man army working 40 hours in a week.  I'm just not quite there yet.

[CapitalCityVendingLLC]

We used to pay ourselves each week.  If we had a good week, we got paid more, and obviously less on a bad week.  My accountant told us to try and flat line it where there aren't ups and downs.  We figured out a good safe number and went with it.  During busy parts of the year, we work hard to make the same amount and the company's bank account grows.  In slow times, we take some time off, but still make the same amount.  We do payroll every 2 weeks.  

About 26.9% of revenue went into our pockets at the end of the day this year.

So far this year:

48.5% COGS

11.6% Expenses (gas, repairs, ins, vehicle repairs, etc.)

39.8% Profit

Our "Profit" is broken down like this.  About 4% of revenue "goes back to the company".  We classify that as when we buy new machines, and equipment(credit card readers, validators, changers, etc.).  I know that should be done before profit is calculated but that's the way we have always done it.  Since machine purchases are so rare, and not a part of our monthly expenses, we put it towards the end of the line.  26.9% has gone into our pocket as "Payroll".  The remaining 8.9% has gone into the bank.  

 

That is this year's breakdown so far.  Each year is different.  Some years, you expand your company and spend a bunch on new equipment, therefore taking less payroll.  Big picture is try and keep your profit margin as high as you can, and that will help you have more money to either pay yourself or put back into your company.  I'm always looking at ways to increase our margins.  For example, we have driven (haha) our fuel costs down to 2.3% of revenue this year.  Three years ago that number was 5.2%.  Two years ago it was 4.8%.  Last year it was 3.2%.  Those couple percentage points add up and eventually end up in your pocket.  

 

As previous posters have said, each company is different.  This is just a brief look into how we do ours...

[AngryChris]

1 hour ago, CapitalCityVendingLLC said:

We used to pay ourselves each week.  If we had a good week, we got paid more, and obviously less on a bad week.  My accountant told us to try and flat line it where there aren't ups and downs.  We figured out a good safe number and went with it.  During busy parts of the year, we work hard to make the same amount and the company's bank account grows.  In slow times, we take some time off, but still make the same amount.  We do payroll every 2 weeks.  

About 26.9% of revenue went into our pockets at the end of the day this year.

So far this year:

48.5% COGS

11.6% Expenses (gas, repairs, ins, vehicle repairs, etc.)

39.8% Profit

Our "Profit" is broken down like this.  About 4% of revenue "goes back to the company".  We classify that as when we buy new machines, and equipment(credit card readers, validators, changers, etc.).  I know that should be done before profit is calculated but that's the way we have always done it.  Since machine purchases are so rare, and not a part of our monthly expenses, we put it towards the end of the line.  26.9% has gone into our pocket as "Payroll".  The remaining 8.9% has gone into the bank.  

 

That is this year's breakdown so far.  Each year is different.  Some years, you expand your company and spend a bunch on new equipment, therefore taking less payroll.  Big picture is try and keep your profit margin as high as you can, and that will help you have more money to either pay yourself or put back into your company.  I'm always looking at ways to increase our margins.  For example, we have driven (haha) our fuel costs down to 2.3% of revenue this year.  Three years ago that number was 5.2%.  Two years ago it was 4.8%.  Last year it was 3.2%.  Those couple percentage points add up and eventually end up in your pocket.  

 

As previous posters have said, each company is different.  This is just a brief look into how we do ours...

My numbers are different than yours but I think a lot of that has to do more with rapid expansion this year (and each previous year) rather than anything else.  My COGS are higher than yours but I believe a lot of that has to do with the fact that I have gotten a LOT of new revenue this year.  I went from 55% COGS from January-August to 60% COGS from September-to-date.  I know the COGS will go down over time once I stop stocking new accounts that have not generated revenue yet.

As for my repairs, they are significantly higher than yours (in terms of percentages) as I have reinvested much into my business.  I would say 50% of my repair/maintenance expenses are from upgrades as I continue to replace validators and convert some machines to MDB.  I have seen many of these accounts go up in revenue to more than cover those expenses within a year but I obviously won't see those returns right away.  Since much of my upgrades are recent, those expenses are also inflated like my COGS.  If it weren't for any of those, I think I would be sitting around 25% like you.  Based off of all of the crunching I have done, I really believe I am going to see something near 28% net operating profit next year, but that is assuming that I do not gain any more accounts.  It's very difficult as I have just enough money to support my family but not quite enough to expand much.  The good part is that I have a lot of decent equipment out there in under performing locations.  We all know what that means.  But since Winter is going on in full force right now, I don't see myself going out in my garage and refurbishing much right now.

Here is a simple breakdown of what my numbers might look like in a typical year without any new or lost accounts: 55% COGS, 17% other operating expenses. 28% profit.

2016 was not a bad year for me at all, but I may have bitten off a little more than I could chew within the past 3 months.  I'm pretty much caught up though and I actually collected more in one week (last week) than I typically collect in 2 weeks.  That was the highest grossing week I have ever had.  Hopefully this week is similar but I doubt it lol.

[CapitalCityVendingLLC]

Well congrats on the growth.  We grabbed a couple new/better accounts this year and dropped our worst 5 or so accounts.  Try and get that COGS down near 50%.  A dime here or nickle there adds up.  I'm not sure how our operating expenses are so low but I'm not complaining.

[AngryChris]

I don't think it's that your expenses are "low" but, rather, mine are "high."  And yes, I am trying to get below 50%.  The simple solution is to raise prices and I have been working on that.  I have an entire list of maybe 20 accounts that need price increases ASAP.  I have just been waiting until I have the resources, time, and money to move machines around if they refuse to let me raise prices (ie. I have to pull machines).