Paying yourself as an employee as well as an owner

In a recent conversation with a small startup landscaper I was told by him that he had recently left the employ of another firm where he was paid $17 per hour. I asked him how things were going as a new entrepeneur. He said it was hard, but that he was glad to be in control of his work and that he was proud to be developing his own business. He also said that he was happy to be earning more than he did as an employee. I asked him what his company’s bill out rate was and he told me that he was billing $25 an hour.

I was a little concerned and asked him if that was a high enough rate to cover all the costs of a startup business and his answer was and I quote, “it’s great, cuz I am getting paid $8 more an hour than I was paid when I worked for the other guy.”

Now I did not want to rain on his parade, but I had to say to him, “are you sure that that is a high enough rate to be able to pay yourself as the employee and also as the business owner? How are you to protect your earnings if you are to become sick or need to take a holiday and thus need to hire someone to cover you, the owner’s work load?” He did not seem to truly understand. I then said to him that I felt it important for him to consider doubling his rate so he could have the revenue to allow him to afford to grow. His answer back, which was a little confusing, was “but if I double my rate, I will lose half my customers.”

The moral of this story is that if you want to succeed in business, you must know your costs and set your rate to be profitable above those costs. Your costs must include the rate that you would like to pay yourself, the employee and have profits above that for you, the owner.