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Show Notes

In this episode we explore 6 common reasons service based business owners struggle to pay themselves.

Each of the 6 reasons covered talks you through the practical side of WHY this is happening so that you if you identify that one or more of these apply to your business you have the knowledge and context to change them and start paying yourself MORE from your business.

Resources mentioned in this episode

Episode with Ange Henderson: https://www.angelahenderson.com.au/cashflow-crunch-reasons-business-owners-cant-pay-themselves-with-laura-ohagan-episode-343/

Episode 005 on Parkinson’s Law https://laurajohagan.com/2024/04/22/005-this-little-known-law-is-why-you-never-have-any-money/Looking for help to transform your business into the thriving, profitable business you know it could be? Book a Discovery Call with Laura here www.laurajohagan.com/book-call

Connect with Laura

Website: www.laurajohagan.com

Email: hello@laurajohagan.com

Instagram: www.instagram.com/laurajohagan

 

Episode Transcript

Hello and welcome back to another episode of Prosper and Profit. I am, as always, thrilled to have you back here, be back in your ears for another week, another episode and dive in and look at how to get more financial reward for you from your business. So if that is something you are keen to learn about, to hear more about, to start being able to implement and act on in your business. You are in the right place. 

So today’s episode, we’re going to look at the five reasons business owners struggle to pay themselves. Now for context, I did a podcast with my friend, Angela Henderson a couple of months ago and this is actually what we had planned to speak about. We’d planned to speak about the five reasons business owners struggle to pay themselves. 

Once we got chatting and once we got into recording the podcast, we went sort of into natural flows of the conversation, which is really normal and we didn’t get to cover all five. So, I thought they were really important and I wanted to circle back around to them because I think in Ange’s podcast, we covered maybe one or two but I had sat and spent time thinking about the five reasons and I thought they were really important to share. I’ll link the podcast with Ange up in the show notes because that is a great listen. We had a great conversation, I love the guest podcast episodes where it’s more of a conversation because I think sometimes it elicits other interesting things and different kind of exploration through the conversation. So that is one worth checking out if you haven’t heard that one. 

Let’s then explore the five reasons why business owners struggle to pay themselves. What I’m hoping to do with each of these is refer to either a client example or something practical, so if this is one of the reasons that you’re not paying yourself, you’ve got some ideas of things that you can go and do about it. So it’s identifying which of these apply to you and then once you have that awareness, what are you going to do about it? Okay. Cause that’s the most important thing. If you want to make change in your business, right. Learning and listening to this podcast is one thing, and it’s such a great thing, but then thinking about how to apply it in your business is the next step. 

If you want help applying this in your business in a really holistic way and in a really deep way and in a way where you don’t have to figure this all out on your own, then please don’t hesitate to reach out. There is always a link to book a discovery, call in the show notes as well so that can be an another great place to get started.

So let’s dive in.

The first reason that business owners struggle to pay themselves, is they’re just not looking at the numbers. Right. And so they don’t actually know what’s going on, how much it costs to run their business. Often people have a good idea of how much revenue or income is coming in but they’re not necessarily sure on what’s happening with it. And, just without that clarity, right? 

It can be easy for A) all of the money to be spent in the running of the business, which is what we touched on in the previous episode on Parkinson’s law, so that’s another great episode to check out but just by not looking at the numbers and not kind of spending time understanding the money position of their business is a reason why business owners aren’t paying themselves because then they have a whole bunch of unanswered questions. 

How much should I be paying myself? When should I be paying myself? Can my business support paying myself? How much does it cost to run my business? What will be the implication iff I do pay myself and there’s not enough money to run the business and all of these things. So this was where the conversation in that podcast with Angela really touched on, which was exploring the not looking at the numbers piece, so we did a deep dive in that there.

But I just want to pose the question, the thought process to you, do you understand the money flowing through your business? Do you have an idea of what your business is generating? How much it costs to run your business? The profitability of different services, whether you’re making a cash profit? How much you could be paying yourself? All of these things. Do you have that feel for your business?

A lot of people feel that looking at the numbers is outside their zone of expertise because they’re an exceptional service provider. My clients sit across health, beauty, professional services. So whether they’re a personal trainer, a physio, a hairdresser an aesthetician, a marketing agency, lawyer, coach, you know, providing all kinds of different services. There are technical expert in that and what they do there but in my experience, a lot of the people that come into my world and who gravitate towards working with me. Feel like the numbers isn’t their natural lingo. Now, that’s not everyone. I have some people who come to me who are really in depth with the numbers and want to turbocharge things and make them better. Especially if they’re about to embark on a big financial investment, taking out a business loan, potentially about to do a big expansion of their business or their business has just gone through a big expansion. Often those clients come saying, “Hey, I feel like I’m doing good, but I want to do better”. 

And then I’ve got this other group of clients who just feel like, I know money’s coming in and I know I seem to be doing okay, but I couldn’t hand on my heart know for a fact. It’s more of a gut instinct or I know there’s some problems that I haven’t been looking at them and I don’t know how to solve that. My debt is starting to, get a little bit out of control or I can’t pay my credit card off this month or I haven’t paid myself for the past few weeks or the past couple of months and I want to solve that. So my clients usually sit across those three different areas.

One of the first things that you want to do if you’re in the position of not paying yourself is start to understand and look at your numbers because they’re going to reveal the story as to why. Why there’s not enough cash available to pay yourself. Okay. So that’s the first reason that business owners struggle to pay themselves.

Now the second one that I see come up a lot and I’ve got a specific client example to speak to here is they don’t actually know how much they should be paying themselves or they could be paying themselves. And almost with that uncertainty, what they do is they do nothing or they draw out owner’s drawings on an ad hoc basis. So maybe, oh, well, you know, it’s the end of month and I need $2,000, so I’ll draw $2,000 out but they don’t have the knowledge or an understanding of what their business can actually support in terms of paying themselves. And so they do nothing. I had a client who came to me and we worked together on this. She was that exact person. She was drawing money out of the business on an ad hoc basis, actually, I’ve got two clients who I can think of who both had this come up, they both were drawing money out of the business on an ad hoc basis but they weren’t effectively paying themselves a weekly or fortnightly, consistent salary for the work they’re doing in the business. And the reason was. They didn’t know how much they could. They didn’t know how much the business could support them. It just felt very unclear. So there were lacking clarity around that.

What I find is we have humans, self included here, is when we don’t have clarity when we aren’t clear, on what we should be doing or could be doing, we haven’t made a decision on that. We tend to just do nothing about it. Both of these clients were actually accruing a fair bit of money that was building up in their business, but they just were like leaving it there for, you know, a rainy day for some kind of thought, maybe I’ll draw it out later. Maybe when my accountant tells me at the end of the year. They were just kind of waiting for an answer of what to do with that. So that’s the second one I’ve seen with clients that come through is they just don’t know how much they should be paying themselves. So what they tend to do is just draw out the minimum they need. Or on an ad hoc basis. 

The third one, which again, touches a little bit on what we’ve just spoken about there with number two, which is a money mindset thing and there’s so many layers to this, but what I commonly see is thoughts around, well, I’m not in it for the money. I had a client, we did a lot of money mindset work, she had the mindset, the story that she’d picked up somewhere in the past around helpers don’t get paid. That was really entrenched in her and her profession was a helping profession. So she had that mindset. So the third reason that business owners struggle to pay themselves is their money mindset. And that can link through to their own personal, like worthiness of receiving. But also can be in a scarcity mindset they can be subconsciously sabotaging being able to pay themselves.

So the money mindset is one to look at and think about if you’re someone who’s struggling to pay yourself. What thoughts, what beliefs do you have about paying yourself? It might be like I’m not in it for the money. Right. It might be when you do work that you love, you won’t get paid. Right. It might be something like my client that I mentioned, helpers don’t get paid. It might be that, I’m used to struggling. Right. One of my clients. I could see she had a big block around this that came from the family around the type of people they were. And they, weren’t the type of people to have a lot or to just even purchase, not even massively extravagant things but slightly luxurious things. And so she had a story to overcome there and torewrite about it’s okay for me to have more than I need. Right. And so potentially there might be something there for you around that. About just having enough to survive versus actually stepping into and elevating into another level where it’s okay to have more than that.

We’ll talk about money mindset in the future, because there’s so much we could do, multiple episodes on that and really just scrape the surface, but I wanted to highlight today that potentially that is a reason that you’re struggling to pay yourself and it’s not as, tangible, I suppose, as some of the other ones that we’re speaking about, but our mindset is running the show. So if you’re thinking I’m always going to be struggling. I never have enough money. I come from people that struggle. Like struggle is how we’re made. Any of these things, that’s an opportunity for you to look at because your business is then facilitating results that match your ultimate beliefs. 

That’s why there’s never enough money to pay yourself nno matter what seems to happen, where money’s kind of burning a hole in the pocket of your business. That’s another one. You know, people just saying I’m not good with money, money always burns a hole in my pocket, you know, money is hard to come by. You’ve got to work really hard to make money. All of these things are money mindsets that are potentially impacting what’s happening in your business and why you are struggling to pay yourself no matter how much money is coming through. I want to highlight this because we think that our problems are going to be solved by having more money in our business. But. If we think money always burns a hole in my pocket. What do you think happens with $750,000 of turnover? Just burns a hole in the business owner’s pocket, right. And this, they still don’t have money left over. 

So this is not an income level thing. Obviously, if your business is right in its infancy, it’s very early stages and you’re not bringing consistent amounts in each week, each month then, yes. Okay. That’s your work to do there, but I’m speaking to the more established business owners who have an established client roster who have a level of consistent income, turning over more than six figures, and, you know, what seems like it should be enough to pay yourself and yet there just doesn’t seem to be enough leftover. If that’s you and it wasn’t about the numbers and it wasn’t about knowing how much and it might be a combination of all of these. But have a look at your money mindset and sit down and I would just write on the top of the page, “What are all the things I think about money?” and just list out as many things as you can. 

All those things, you know, some of those ones I mentioned could be prompts to get you started. Money’s hard to come by. I never have enough money. Money goes out faster than it comes in. I’ve never been able to hold money. I’m not in it for the money. Right? When you do work you love you won’t have enough money. All of these things write down. If any of those resonate with you and you’re like, aha, yes. I believe that. I think that all of the time. Right. Start to write a list of them and create some awareness of it because awareness is the first step to change. You can’t change what you can’t see and what you don’t have awareness around. 

So list those out and start looking at, are these creating my current reality? Are these impacting what’s happening in my business and what do I need to change here? Right.

The fourth one, and these aren’t all stand alone, you know, like we can see the money mindset might impact the not looking at the numbers, because if you believe I’m not good with money, then of course you’re going to avoid looking at the numbers. So I’m not trying to say like, it’s just going to be one of these and these are each independent, these are the things I see and they could be interconnected or a number of them could be interconnected with you. So number fours is that your running costs are too high. The cost to run your business is just too high. Now that might be as a result of your money mindset, that might be as a result of not looking at your numbers so you can see how that impacts it. Right. That might be as a result of what we spoke about in the last episode, which is Parkinson’s law and just having everything there and the demand for the money is just expanding to meet the supply.

But one of the key reasons that business owners struggle to pay themselves is their running costs are too high. 

Now, there can be a number of reasons why that is. But that’s a fact, if there is not money available to pay yourself and the business seems to be chewing through most of what comes into it, if you struggle to come up with your quarterly GST payments, if you struggle to have your income tax at the end of the year, if you’re struggling to pay yourself and all of the money seems to be flowing back into the business, you’re running costs are just too high. And I would definitely suggest going back and listening to episode four, where we spoke about Parkinson’s law, to start thinking about that, if my running costs is so high, I’m not getting the financial reward, my business isn’t truly sustainable because I’m not paying myself a living wage. So that’s something to have a look at and it’s something that comes up with my clients, especially when you might be in this position where maybe you’ve been kind of using your credit card as an overdraft and then a month comes when you can’t pay that off. Or you’ve got a tax debt with the ATO, you know, debt starts to kind of creep up or yes, you were paying yourself but over time it’s just been less and less and less. 

Your running costs are just too high and it’s time to find efficiencies in your business. Find innovation to run it off less and to put constraint around it. I’ve got a couple of great resources that I could point you to. So if that’s you send me a DM on Instagram, we can have a message chat and I can point you to some resources that I have about how to start increasing profitability by running your business more efficiently. I’ve got a couple of things and I’ve got a really great video training on that. 

Okay. So the fifth one it kind of links with number two, which is they don’t have a process for paying themselves, or it’s more of an afterthought. Right. So that’s where, you know, similar to number two, which was, they don’t know how much they should be paying themselves. So with this one, they don’t have a process for paying themselves. And so they almost don’t know how to pay themselves. So what they find themselves doing is drawing money out on an ad hoc basis. They haven’t got a rhythm for themselves. They haven’t given any thought into, what does it look like to set myself up, if you’re a company right, as an employee, right? If you’re a sole trader, right. They don’t have a process set up for payments and a process doesn’t have to be complicated, but it’s almost like they’ve just never given a thought in terms of, I’m entitled and probably really should be paying myself a wage. So what do I need to put in place to do that?

When I work with my clients, we set up a rhythm for doing their Profit First allocations and we set up a rhythm for paying themselves and getting in that habit and establishing that habit is key. Even if you’re starting with something small and you want to grow it over time, just because it’s small doesn’t mean you shouldn’t pay yourself. The rhythm should be established and then it can grow over time. But again, just another one that I see in that they just don’t have a process for paying themselves. 

Oh, look at this. We actually have six. The six reasons business owners struggle to pay themselves. This is one that I see a lot more for online businesses. However, it does apply for traditional bricks and mortar businesses too, it’s just not something I see as commonly there. More commonly in the bricks and mortar businesses is the running costs are too high because you’ve got rent, you’ve got staff, you’ve got electricity, you’ve got more fixed costs and so that’s something I commonly see there. And I’m just kind of painting this out because if you’re in one of those businesses, this may not apply. But if you’re an online business, this is probably very much going to be applicable, which is business owners that over investing in growth and hoping that growth will solve the profitability and paying themselves problem by growing revenue.

Now, what do we actually mean by this? This idea of over investing in growth. So there is a lot of talk in the online space and in the online world, that if you’re not investing at a high level, you’re just not serious in your business and so what I’ve noticed is there’s a trend for people to be over investing and spending more than they need to in the hope that it’s going to generate growth. Whether they’re working with different coaches, different ad agencies, whether they’re over-investing in their ad spend and hoping it will pay off later. There’s all different ways this might look, but it’s usually either around marketing and or coaching. It can come up in other ways too, but they’re two of the biggest pain points I see.

So business owners are spending more of what’s coming into the business then they should. Investing in things that they hope, right, that aren’t always proven. I had a client who was doing this, where she kept buying these courses she was doing it at a smaller scale but it was adding up like lots of small courses, hoping that they would solve the problem and realising that they didn’t. And it was just taking away from the day to day ability to pay herself and it wasn’t paying off. So we came up with a process for evaluating those kinds of investments and return on investment. So how do we evaluate and make good decisions and think about the return on these.

It’s so common and I’m not saying don’t have coaching and don’t invest in any growth, but what I’m saying is it’s very common in the online world to be over investing in growth and spending way more than you really feel comfortable to, or more than your business can truly support with some kind of hope, and whether the program of saying it well, that’s a whole different story, but with the hope that it will pay off and that it will generate more income so that you can pay yourself in the future. I found for a lot of people, they get caught in a hamster wheel and a trap of constantly re-investing everything back in and hoping they’ll have this one day pay off. And they don’t, it’s not sustainable or the business is growing, but it’s still continuously taking everything it brings in to keep it operating at that level. So they don’t get to pay themselves. 

This can happen with 300, 400, $500,000 turnover businesses, right? The business has grown the business might’ve doubled, but so have the running costs and so that business owner gets in a trap where they’re spending more hours of their time, they’re working more, they’re having to deliver way more services because you know, they’re marketing and spending to acquire more clients and more business into their business. And they’re working so much more to cover the cost of that and it all just spirals out of control. 

So looking at the time and the team and also what’s a reasonable level of investment. Right. And I can’t tell you exactly what that is, but looking at your business and establishing, you know, how much should we be reinvesting back into the growth? Right they’re important things to look at because as I said, it becomes a trap, becomes a cycle. It becomes constantly working more, delivering more, yes, getting more revenue and the business looks like it’s growing, but it’s not translating to more financial reward in the business.

That can take a bit to unwind in terms of changing the mindset and actually finding more profitability in the business now, more financial reward in the business now and finding efficiencies then in the business now and then scaling that. Because scaling an inefficient business means scaling inefficiencies, right? If your business is not efficient and profitable now and you are scaling it. You are scaling the inefficiencies and you are scaling the unprofitable lines of business. So we want to get efficient first. Get it profitable first. Get it working really, really well and then we scale that because then we’re scaling profitability and we’re scaling efficiencies, that means you can deliver more without necessarily always working more to achieve that. 

So that’s the six reasons that business owners really struggle to pay themselves. 

I wonder which one apply to you? Whether it’s a few, maybe you’re someone who’s just tuning in and listening and thinking, well, I actually am paying myself and I’ve had those things in the past or I can see how their traps, but I’ve set myself up not to have those. But if you’re like most people, there’s probably one or two, maybe a combination, maybe all of them that are coming up for you. 

I want to normalise that these are very common experiences and often we think we will outgrow the problem by just growing the size of the business and I want to offer a different thought for you, which is fix and find the efficiencies now. Solve these problems in your business now. Then scale and grow. And your life is going to be so much easier because what I see people doing. And what scaling just means, like magnifying, what is right. If you magnify and scale up an unprofitable and inefficient business, you end up with a bigger unprofitable and inefficient business, you don’t necessarily solve the efficiency problem. Because, like we spoke about last week with Parkinson’s law, like we spoke about with some of these things, if it’s a money mindset thing, if you’re running costs are too high, you’re running costs will likely grow at the same rate as your revenue. 

So business can double and you are still not taking home what you want. So I hope that’s been helpful in terms of creating awareness. And if any of these are coming up for you and you know, you want help in solving these cause these are all things I work with on my clients, these examples have all come from client examples, then reach out book a Discovery Call. Let’s have a chat about what it looks like to pay yourself more and find efficiencies in your business now and we can do that work together. Literally in a matter of months, your business can be feeling so different. So I’m going to love you and leave you there and I’ll be back in your ears really soon with another episode. Bye.