How much should an owner pay him or herself?
Some of you might say “as much as possible.” The real answer is a bit more nuanced.
Let’s first define earnings. I define owner’s income as follows: Net to owner = a combination of owner’s salary and company net profit after company incentives and bonuses are paid out but before taxes.
It excludes normal perks and rent that might be paid to the owner in his/her capacity as landlord, since those are normal costs of doing business. Net to owner is not about “How much can the owner earn?” but rather, “How much can the operation efficiently produce in terms of profit to the owner?” This is a subtle but important difference.
What do high-profit owners earn?
The average contractor with more than $1 million in annual revenue earns 8 percent net to owner. However, the high-profit contractors I coach earn more than 16 percent on average with some earning much more. What are you earning? What can you do to increase your net-to-owner figure? These are the key questions that define how efficiently your business is being run.
The real trick, however, is turning those paper profits into real cash. (This is also known as having a positive operating cash flow.) This is done through meticulous attention to how maintenance contracts are written and billed, so you’re never upside down on your work performed.
You must also pay strict attention to your return on assets, making sure you’re putting your working capital to good use. If your company requires too much capital to run, then it won’t be able to pay out that money to you as the owner.
Having a positive operating cash flow will ensure that you can pay out your net-to-owner earnings.
There’s a lot of talk, and even some bragging, about how profitable such-and-such company is, but in the end, the net to owner defines what a business is worth on a year-to-year basis to its owner.
Editor’s note: To learn how to better manage your business by the numbers, join Jeffrey Scott in his 3-part webinar series, “Managing By The Numbers,” brought to you in part by Landscape Management.
