- For years, I took cash out of my business randomly, with no plan. I spent freely during prosperous months and lived on beans and rice during slow months.
- When I enrolled in a business mentorship program, I was told to pay myself a salary. That was life-changing advice.
- Now, I track my cash flow and maintain business reserves so I can run my own business without money anxiety.
- Sign up to get Personal Finance Insider’s newsletter in your inbox Â»
When I started my own business as a craftsperson in my 20s, I knew nothing about business. I picked up tips about selling from other artists. I learned to file my own business taxes and do sales tax returns. But I remained clueless about how to manage my business finances for several years.
It wasn’t until I got into classes at a mentorship program for women entrepreneurs that I had the “aha” moment that set me up for business success.
Feast or famine running a seasonal business
I fell into running my own business as something of a lark. It started as a fun side gig that I didn’t expect to make much money. I made jewellery, painted scarves, and eventually ended up making printed clothing.
I ran my crafts business for more than 20 years. Over time, it grew from a side hustle into a small-but-thriving enterprise with loyal customers and steady income.
The business had a very predictable seasonality. I went to craft fairs from March to December. I made the most money in May and October. From January to March, money only flowed out as I paid fees for the year’s craft fairs. Most of my years in this business were before the internet, so I had no income during the winter when there were no craft fairs.
In October, I lived high on the hog. I bought new furniture and took myself out to dinner. By the end of January, the money from my holiday sales was almost gone and I struggled to make ends meet. Because I hadn’t yet gained money management skills, I was mystified by my winter penury.
All that changed when someone suggested I take a class with an organisation that trained women entrepreneurs.
Mentoring changed my relationship with my business and my finances
Looking back, knowing what I know now, it seems crazy that I started a business without bothering to learn anything about running a business. Thank goodness I finally got help, after being in business for about seven years.
Women’s Initiative for Self-Employment (WISE), where I took classes and got mentored, closed several years ago. However, there are many similar organisations, such as the Renaissance Entrepreneurship Centre, still mentoring entrepreneurs in the Bay Area.
My WISE mentor showed me how to create a spreadsheet to track my cash flow. After we looked at the money coming into and going out of my business, she gave me the best advice I ever got in business: instead of taking all the extra cash out of my business every month, I should pay myself a regular salary. Whatever I didn’t need for my salary would stay in my business account to cover expenses and the next month’s salary.
As soon as she gave me this advice, I had a face palm “Duh!” moment. How could I not have seen it? I had more money than I needed in October. The excess would pay for me to live through the winter until my shows started again. I could live comfortably every month with a regular salary.
How I set myself up for success
When I started a new business as a freelance writer seven years ago, I immediately set up a spreadsheet to track my income and expenses â€” including the salary I would pay myself.
This wasn’t easy in the early years. As I was building my business, I often didn’t have enough money coming in to cover all my expenses. I waited anxiously for client checks to come in. I was stressed.
During this time, I needed all or most of the money from my business just to pay myself enough to live on. Some months, I couldn’t afford my whole salary. I wasn’t able to set aside funds from the good months to cover the slow months because my business was too new to have good months.
During this period, I violated one of my most basic rules of client relations: I nagged a client about a payment that wasn’t yet late (but was later than they usually paid). I finally reached a point where I was so stressed out by my cash flow that I knew something had to change.
To make my business work, I had to pay myself a regular, predictable salary every month. It didn’t have to be a lot, but I had to have the money on the first of the month. I didn’t want to be in a position where my life would fall apart if a client paid me late.
I realised I needed a business reserve of at least three months’ salary to pay myself consistently. That would give me time to collect any late invoices before my financial situation became dire.
To build up a reserve, I took a part-time job. I kept most of the money from my business in my business account and lived off the money from the job. By the time I left that job, I had built a roster of client work that was enough to pay my bills. And I had more than three months of my salary in reserve.
When the pandemic hit, my income dipped in the first few months. I reduced my salary because I didn’t need as much to live on, but I never had to worry where my next paycheck was coming from. My reserve levels out the financial ups and downs.
The self-employment principles I’ve lived on
My business mentor gave me the great advice to pay myself a salary more than 20 years ago. I doubt if I would still be in business if it weren’t for her guidance.
This advice seems like a no-brainer to me and I’ve passed it on many times. I’m always surprised how many self-employed people don’t pay themselves a salary. Here are my principles for setting yourself up for success, whether you’re a full-time entrepreneur or working a gig as a side hustle:
- Put all the income you get from your business into a separate account or accounts.
- Pay yourself a regular monthly salary. Even if it’s a small amount at first, make it regular.
- Keep reserves in your business account to pay for taxes, overhead, and other business expenses as well as your salary. That will save you from raiding your personal account to keep your business afloat.
- If you have extra money at the end of the year after all your taxes and other bills are paid, go ahead and give yourself a bonus.
I never wanted to be a 9-to-5 employee, but I do like having a predictable income. Paying myself a salary from my business allows me to have the best of both worlds.