Why Your Startup Isn’t Cashflow Positive Until You Make A Living Wage
You work really hard for years building your company. And you’re burning through your savings as you build your company.
Finally, finally you get your company to cash flow positive.
“Thank goodness,” you say to yourself. “We’re finally free of needing more money.
“Now, the business is self-sustaining. We can just invest the profits of the business back into the company.”
So it’s a rude shock when you realize that your company isn’t truly profitable even though your company is cash flow positive.
How can this be? Cash flow positive means you don’t need money any more, right?
Let me tell you about my friend Mark.
I met Mark a couple of years ago. He has a really cool company that he and his business partner started. They received some angel funding that helped them, but they are truly bootstrapping.
I love their business and their business model. Their product is unique. And, slowly but surely, Mark’s company has gained traction.
I tell Mark the same thing every time I see him. “When are you and your partner going start taking a salary?”
Mark’s answer is the same each time, “When we’re profitable.”
I wish I could get Mark to change his mind, but I haven’t been successful, yet.
You’re only truly profitable when you and your company are cash flow positive.
Congratulations. Your company is profitable, but you’re still draining your bank account.
Guess what? You haven’t achieved true profitability yet.
You’ve achieved true profitability when you are no longer draining your personal bank account of money.
Somehow, there is this misconception that your investors expect you to starve while you build your company. Nothing could be further from the truth.
Experienced investors know that it’s important for you to make a living wage. In other words, your investors want you to have a big enough salary, so you don’t have to worry about paying the bills each month.
Now, I’m not saying that you should pay yourself a huge salary. That doesn’t make sense.
However, I am saying that you should, as soon possible, pay yourself enough money, so you can pay your bills.
Why you should pay yourself a living wage.
I recommend to every entrepreneur I work with that they pay themselves something as soon as possible. Just pay yourself something. Even $100 per month is okay if that’s all you feel comfortable with.
The benefits of paying yourself a small salary go beyond the small amount of money you will make. Let me explain why, except this time I will use a negative example.
There was another entrepreneur I worked with named “James”.
James didn’t pay himself a salary.
We were going through our bi-weekly review of his company. The revenue was growing, and the company should have been cash flow positive.
In fact, cash from operations was growing, so it didn’t make any sense why James’ net cash position was dropping.
Then James gave me the answer. “My wife wants me to repay the second mortgage on our home.”
“But there’s no loan on the books,” I said. “You can’t just take money out of the company. You have shareholders.”
‘You don’t understand. We have to pay off that mortgage.”
“I understand what you want to do, but you can’t do it that way. You’re embezzling money from your company.”
You don’t want to put yourself in the position where you will be tempted to do the wrong thing.
I instantly knew I would have to stop working with James because James was embezzling money from his company.
I was bummed.
I had been working with James for a while. And James’ company had gotten to a nice amount of revenue and was cash flow positive.
James was going to blow it big time if he didn’t change his thought process. James wouldn’t change his mind, so I told James our business relationship was over.
I’m not saying that not paying yourself a salary will result in you doing what James did. Mark is proof of that. But why put yourself in a bad financial position?
Instead start the discipline of paying yourself a small salary.
- You can start with as small an amount as you want, then…
- Start paying yourself more as the health of your business improves, then…
- Keep increasing the amount you are paying yourself more until you are paying yourself a living wage.
Disciplined cash management leads to better results for your company.
I am a big believer in being what I call “Appropriately Frugal” when you are the CEO.
Simply put, being Appropriately Frugal means that you spend money on the important stuff for your business, and save money on everything you can save money on.
However, you and your employees are not the area to save money on.
You do want to attract the best employees. Then you will need to pay them appropriately.
Again, I’m not saying that you should pay your employees crazy salaries. But I am saying that you should pay your employees market rate. Pay your employees as much as you can if you can’t afford market rate:
- Your employees will feel appreciated, and…
- Your employees will not have to worry about their finances.
The idea that your employees will accept less than market rate because you are just starting only makes sense if they can afford it. Otherwise…
- You will not retain your employees, or…
- You will not hire the best employees, or…
- You will not hire any employees at all.
So why aren’t you willing to pay yourself if you are willing to pay your employees?
Why are you any different than your employees?
You are the most important asset your company has. You will not be at your best if you are constantly worrying about how you are going to pay your bills each month.
Just remember that true profitability comes when your company AND you are cash flow positive.
And Mark, I know you’re reading this post. I hope you have decided to pay yourself something. If you haven’t decided to pay yourself something, then I hope this post helps to change your mind.