I didn’t learn it on my first go around. I studied a lot about entrepreneurialism and small business. Like many, I read books, articles, and most whatever else I could find on the topics. However, what most missed on was the financial part of operating a business.
Sure, most of these books talked about ideation, sales, marketing, and how to handle employees. These are all vital subjects for future business owners. However, most business owners also start a business to make money. Yes, many have a passion for what they do, but few are willing to do it for free.
Now having moved on to my second and third ventures, I have the benefit of being able to look back and realize my mistakes (oh where to start?!?). By far, the biggest one, was not paying myself first. Maybe this isn’t the number one “tip” I can give owners, but it certainly ranks near the top. This is also one many business books skip. Perhaps it is because they just assume your business will be wildly successful and not ever need to worry about paying yourself. I guess most literature assumes there will be so much money that paying yourself first is just a natural byproduct of being and entrepreneur.
Perhaps it is also because accounting and finance generally doesn’t sell books (unless it is to people like me). For some reason these aren’t considered sexy subjects so most of the books throw in a quick line about finding a good bookkeeper and leave it at that.
I can tell you most business owners are not flush with so much money they don’t know what to do with it all. I say this based off many experiences. Having both been a business owner, worked as a consultant, and had the fortune to call many owners friends and acquaintances, I can confidently say that most do not have a problem with having too much money around. However, I can confidently say that most do have a problem with paying themselves first.
A Little History Lesson
Nearly a century ago, the phrase “pay yourself first” was coined. The phrase was first coined in the 1920s by George Samuel Clason, who founded a successful publishing business in Denver, Colorado. The Clason Map Company was the first to produce a road atlas of the United States and Canada (it was easier back then…there were less roads), and was so successful that in 1926 Clason began to distribute pamphlets on financial success to banks, investment managers, and insurance companies.
These were just pamphlets made up of easy tips and tricks from a successful business person. The pamphlets delivered financial wisdom through parables set in ancient Babylon, which had been the richest city in the world.
Clason’s first pamphlet told of two friends who wondered why they had earned so much throughout their lives but had nothing to show for it. To uncover the secret to building wealth, they asked their friend Akrad for advice. Akrad was not just a stranger on the streets….rather, he was known as the richest man in Babylon despite his incredible generosity and reputation for giving to charity. Arkad would give lessons with names like “Seven Cures for a Lean Purse” and “The Five Laws of Gold.”
In the first and most popular story, Arkad explains that when he was a young scribe, he met a wealthy man named Algamish who needed Arkad to quickly produce a copy of a law in clay. In exchange, Algamish shared the secret to wealth, revealing that “a part of all he earns is his to keep.” Arkad began saving and investing a tenth of his income. This was what Clason called “paying yourself first.” Akrad found that when he was disciplined and only spent nine tenths of what he made, he was no shorter of funds than when he spent it all.
Continued Today
Perhaps the best book I have found on this topic today is called Profit First, written by Mike Michalowicz (if you have the time, listen to his TED Talk). Many of the budgeting principles that Krieger Analytics employs today are loosely based on Michalowicz’s principles he lays out in his book.
While many CFO types really try to complicate the entire process, it really isn’t that hard. Don’t get me wrong, it can be hard if a business owner doesn’t have certain processes and procedures in place. If a business’s books are crap, if they aren’t budgeting, or if they don’t have sound strategies in place it is nearly impossible to pay yourself first. And unfortunately, that is the state of too many small businesses.
I talk with several owners every month. Many are ashamed to admit things are in such a state. However, I am here to tell you, you’re not alone. Not by a long way. I am also here to say that there are ways out (I say that plural because anyone that says there is only one way is a person I would avoid).
While there are not many singular truths that can apply to all businesses, “paying yourself first” is one of them. I can confidently say that a business that doesn’t provide for an owner is not one that will be around long, no matter how passionate a business owner is about their business.
About Krieger Analytics
Krieger Analytics works with businesses to help them with their profits and grow through accounting, finance, and bookkeeping. We are not the perfect match for all businesses so we have honest conversations upfront to see if we are a good match for you. Contact us now for a call to learn more about us and have a conversation about your business.