We all want to get paid, right? Well, for small business owners, getting that paycheck can be a little more complicated than for others. It all depends on your business model, financial setup, and profitability. This post gets into the details of figuring out how to pay yourself when running a small fashion business.
Revenue vs. Profitability
It’s not the answer you want to hear, but this will look different for every business. At Scaling Retail, we’ve seen some fashion startup owners start paying themselves around year two of running their business, even while running a deficit at the end of the year. Here, we’re talking about a business volume between half and 1.2 million in revenue. This is important to think about because there’s a very big difference between revenue and profitability.
You can be a very successful business by making a lot of revenue, but you still have people to pay—possibly, only yourself if it’s a small business. If you don’t plan on selling your business in the near future, then you can definitely collect and expect losses against the income of your business by starting to draw a salary whenever you feasibly can.
This is a very personal decision, and you first should make sure you can cover all of your expenses—like contractors, for example. Then, you can start to take a look at what your takeaway is.
Is There a Formula I Can Follow?
For growing a sustainable business, once you start to bring in revenue, before paying yourself you should pay off products, production, and cost of goods for next season etc. You’ve got to make sure you have the resources and funding to cover everything else.
Don’t worry about the bottom line on your P&L statement if you are showing that you are reporting in a loss. Many successful businesses report losses at the end of the year on their IRS tax forms, and it doesn’t mean that those business owners are not taking salaries.
So, is there a formula to follow? It all depends on what kind of financial setup your business has, where you are getting your capital injections from, and whether or not your business is turning a profit. In our experience, we like to see companies wait until they turn a profit before they start collecting on a salary, or certainly at least when there has been some traction and they know the business is sustainable.
It’s personal, and it’s a fine balance. Ideally, you should start collecting a salary by year three, or at least by year five you should be getting paid by your company at a full-time rate. Hopefully, by year seven and ten, you can consider looking at selling the business or working with a very successful, sustainable, and scalable business model.
If you are on the right track, scaling your business could be your next step. Check out our article “7 Ways to Scale Up Your Fashion Business.” Likewise, there’s a lot involved in the operations side of a small business. Read “How to Hire the Right Team to Scale Up” for more details.
At Scaling Retail, we’ve launched brick-and-mortar and e-commerce businesses all over the world. Need advice from our team of industry professionals and retail veterans? Send an email to email@example.com to start the conversation.