"Pay yourself first" is a financial principle that many are turning to as they try to grow their nest eggs. But when starting a small business, this principle cannot and should not be applied too early. One of the most common pitfalls that small business owners run into is being undercaptilized. They don't have enough money when they start the company, and it catches up with them quickly.
This lack of capital can be a thorn in the side of the owner when she or is dying to take that first paycheck from the small business. A paycheck? I'm wondering how they're going to pay the company's bills and they're worrying about paying themselves!
When you start your business, you should plan on going at least a year (if not more) without a paycheck. If you can take some money out of the company sooner, consider yourself lucky. But most new businesses (especially small ones) just don't have the cash flow to support an owner's salary in the beginning.
The issue of a paycheck can get especially contentious if you've got an outside investor funding the start-up of the business. They want to see their money go toward creating a successful operation, not toward your groceries or mortgage payment.
So what do you do if you need a paycheck? Well if you're lucky, you have a spouse with a steady and adequate income to carry your family while you are in start-up mode. If that's not an option, you'll probably have to rely on savings to get you through. Plan on a minimum of one year without a paycheck, and maybe even more. Also, don't drain your entire savings... you never know when an emergency might arise.
You may also consider part-time work to help pay the bills while you are building your business. Consider freelancing, blogging-for-hire, or teaching. I became a part-time professor at a couple of local colleges to help pay the bills. The evening classes didn't take away from my business, and the paychecks helped make ends meet in the early days of my company.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
Pay yourself first? Not when you start a new business.