Skipped paychecks for owners are a common reality of early stage companies. Both startup and second-stage companies often don’t have the access to capital they need. When cash gets tight, one of the easiest ways to “fix” it is for the founder(s) to hold a paycheck, or simply not write checks at all.
There’s certainly no harm in holding a check for a few days here and there. The harm is in longer term situations of chronic underpayment or lack of payment altogether.
These can be sticky situations to discuss. All other business metrics likely point to success, so bringing up this topic might seem like a failure of some sort. Or the lack of funds may be seen as a function of time; one that will be fixed with growth/more clients/by continuing forward. Whatever the reason, the subject of owner payments often gets swept under the rug.
It’s time to clean under that rug. Please understand – I know you’ve reached this point of success because you’re persistent. And hardworking. And tenacious. But hoping this issue will resolve itself through more hard work isn’t the answer. It’s time to stop and plan before the issue becomes a problem. If you think it won’t, I’ll be happy to take your bet on that one. However, I propose we skip the bet and continue the conversation.
Even if you believe there’s no ability to resolve the situation now (and you may indeed be right), please stop long enough to determine when and how you’ll be able to resolve it.
At this point, one of the best things you could do is pick up the book “Simple Numbers, Straight Talk, Big Profits!” by Greg Crabtree and read the first three chapters. This book is the single most succinct, straight-forward discussion of owner payments I’ve seen, and I personally wish I had found it 15 years earlier in my entrepreneurial journey. If you don’t have time to read all three chapters, start with Chapter 3.
This chapter helps identify where your issue is (for companies in the 1-5 million in revenue bracket the answers are remarkably similar), how to fix it, and how to forecast your profit. After all, the reason you’re not getting paid when you should be is likely to be because you’re not profitable enough. (Cash flow is likely an issue too, but that can be addressed if profit is where it needs to be.)
Keeping an eye on your profit, forecasting how long it will take to reach a healthy profit (Crabtree suggest 10% is the new break-even and 15% is a healthy profit), and figuring out how you’re going to get there as fast as possible is one of the most valuable things you can do for yourself and your team. As Crabtree points out, profitability is the oxygen of a business – without enough oxygen, the company won’t be around for long for anyone.
For Crabtree’s method of calculating profit, he provides a simple spreadsheet as the first download on his free tools page.
And especially if you’re a visual person, I’d use his method of graphing Revenue, Equity, Pretax Profit and Distribution (which you’ll find in Chapter 3 as well.) Forecasting key indicators is your key to answering the “when” question. Happy forecasting!