Paying yourself when starting out

[K91]

Morning all

How did you pay yourself a salary when first starting your business?

Did you have 12-24 months living expenses saved up before starting or did you go for it with less than this, backing yourself to win jobs and gain an income from the start?

I ask as if going down the route of saving up living expenses, this could considerably push the timeline back of when to start.

Thanks

 

[Deleted member 335660]

Morning all

How did you pay yourself a salary when first starting your business?

Did you have 12-24 months living expenses saved up before starting or did you go for it with less than this, backing yourself to win jobs and gain an income from the start?

I ask as if going down the route of saving up living expenses, this could considerably push the timeline back of when to start.

Thanks

I had a mortgage and two children and knew what money I needed to pay the bills.

I then built this salary into my Cashflow forecast for the first year.

Having added in all the other items and projected sales, I worked out how much capital I needed.

I then managed to secure this from the bank and off I went. Sales came in earlier than I had planned and so it all worked out.

Do the same for your situation. If the bank will not provide suitable overdraft facility then you need to raise the capital elsewhere.

 

[Scalloway]

How did you pay yourself a salary when first starting your business?

Like this.

I then built this salary into my Cashflow forecast for the first year.

 

[AllUpHere]

It depends entirely on the business you are starting. Some will make money from day one whilst others may take years to allow you to take a salary.

The 'send your wife out to work' option is a popular way to keep paying the bills at the start.

 

[Frank the Insurance guy]

It may depend on your acceptable stress levels. Starting out with little cash to pay the bills, will put pressure on you to get sales - as a result you may start making the wrong decisions just to get the order you need to pay your mortgage!

I worked out how much 12 months bills (mortgage, electric, gas, water, monthly direct debits) would be and made sure we had that aside before I started my insurance brokerage. My wife's income would cover the ongoing day to day costs - food, petrol, car service etc etc.

It was a relief knowing I could set up the business and do things properly. All sales and income during the first year was a bonus! Without the pressure of having to get a sale to survive, the business thrived and we barely touched the money we had put aside!

 

[K91]

I had a mortgage and two children and knew what money I needed to pay the bills.

I then built this salary into my Cashflow forecast for the first year.

Having added in all the other items and projected sales, I worked out how much capital I needed.

I then managed to secure this from the bank and off I went. Sales came in earlier than I had planned and so it all worked out.

Do the same for your situation. If the bank will not provide suitable overdraft facility then you need to raise the capital elsewhere.

Thanks Trevor

Yes I have a mortgage but also a wedding that needs paying for so the savings option for me may not be an option!

 

[K91]

It depends entirely on the business you are starting. Some will make money from day one whilst others may take years to allow you to take a salary.

The 'send your wife out to work' option is a popular way to keep paying the bills at the start.

I plan to start a construction company so won’t be getting paid until the job is done, which could take weeks/ months depending on the job.

The ‘send your wife to work’ option sounds smart, not that the future wife will think so!

 

[K91]

It may depend on your acceptable stress levels. Starting out with little cash to pay the bills, will put pressure on you to get sales - as a result you may start making the wrong decisions just to get the order you need to pay your mortgage!

I worked out how much 12 months bills (mortgage, electric, gas, water, monthly direct debits) would be and made sure we had that aside before I started my insurance brokerage. My wife's income would cover the ongoing day to day costs - food, petrol, car service etc etc.

It was a relief knowing I could set up the business and do things properly. All sales and income during the first year was a bonus! Without the pressure of having to get a sale to survive, the business thrived and we barely touched the money we had put aside!

I agree that wrong decisions could be made if you’re relying on the income from the offset, definitely something I’ll have to factor in.

 

[AllUpHere]

I plan to start a construction company so won’t be getting paid until the job is done, which could take weeks/ months depending on the job.

The ‘send your wife to work’ option sounds smart, not that the future wife will think so!

You are setting yourself up for hardship if you aren't billing until completion. Staged payments are a must in construction, and not just to ease cashflow.

 

[Mark T Jones]

Personally, I just did without for a couple of months until the cash darted flowing - but that was in effectively a job-replacement service business.

Your projections (including worst-case analysis) should give a fair insight - in your industry I'd suggest that personal wages will be a relatively small part of pre-revenue costs.

As @AllUpHere has said, you really need to work on contracts and payment terms. You are in an industry where payment is notoriously poor and contractual disputes are the norm.

It is potentially possible to borrow some pre-revenue costs by Start UP Loan or factoring (tough, but not unknown in this sector), but borrowing to pay your self is very much at the high risk end of the scale.

 

[WaveJumper]

I have seen many that would have been a good business fall by the wayside as people struggled to pay the bills in the first year or so. As others have indicated either get some funds behind you (and I would double what you think you need) especially if you know the revenue is not going to be rolling in immediately.

The business you’re going into can be fraught we late payers, non-payers or those who will decide the work is not up to standard and even raise a dispute against you ……. Just when you thought everything was hunky – dory

Is there any chance you can ‘do the day job’ (even if going part time for a while) whilst you get up and running?

 

[Deleted member 335660]

Thanks Trevor

Yes I have a mortgage but also a wedding that needs paying for so the savings option for me may not be an option!

Well you might find you have enough equity in the house to support a bank overdraft for the business. As for the wedding, blame covid and put it off a year then you will have lots of money.

Seriously, business is hard enough and you don't want to go home at the end of the day and find a home bill you cannot afford to pay. Better to put the business off a year until you have the right cashflow forecast with all costs built in. I was selling computer systems and allowed 3 months for first order and 5 months for cash coming in based on my experience. I got my first order in month 2. Do the same for your business.

 

[Deleted member 59730]

When I changed direction I had to work on 3 years of no profit. First year loss was £13,000. As the potential of the business increased I needed more capital. It was only in the 3rd year that I saw a small profit. By then the overdraft was running at over £50,000.

 

[Financial-Modeller]

I plan to start a construction company so won’t be getting paid until the job is done, which could take weeks/ months depending on the job.

Will you be working exclusively on one job, then waiting for one payee to pay a single invoice, or will you be working on more than one job, with more than one payee?

Having your livelihood totally dependent on one cheque should probably be avoided if possible.

 

[Chris Ashdown]

Business to business I always worked on 45-60 days from invoice date to getting paid regardless of printed terms

 

[K91]

You are setting yourself up for hardship if you aren't billing until completion. Staged payments are a must in construction, and not just to ease cashflow.

Thank you for highlighting that. That area of the business is not something I’m familiar with at the moment so anything that helps me in that area is appreciated.

 

[K91]

I have seen many that would have been a good business fall by the wayside as people struggled to pay the bills in the first year or so. As others have indicated either get some funds behind you (and I would double what you think you need) especially if you know the revenue is not going to be rolling in immediately.

The business you’re going into can be fraught we late payers, non-payers or those who will decide the work is not up to standard and even raise a dispute against you ……. Just when you thought everything was hunky – dory

Is there any chance you can ‘do the day job’ (even if going part time for a while) whilst you get up and running?

I don’t think it would be a possibility I’m afraid. I’m a construction site manager so don’t think my boss would be keen on the idea.

 

[K91]

Will you be working exclusively on one job, then waiting for one payee to pay a single invoice, or will you be working on more than one job, with more than one payee?

Having your livelihood totally dependent on one cheque should probably be avoided if possible.

No I plan to have multiple jobs on the go at any one time.