For years, my customers paid me in about 120 days. I was running a staffing company, so I paid my people every week, and my customers paid me whenever they got around to it. I told myself that was just how staffing worked. What I was actually running was a bank. I was giving interest-free loans to companies much bigger than mine, and those loans were a big part of how I ended up $600,000 in debt and about 60 days from bankruptcy.
That's the first thing I learned the hard way about money in a business: revenue and profit don't automatically turn into cash in the bank. You can be busy, growing, and profitable on paper, and still struggle to make payroll because of how cash moves through the company.
The short answer: how owners pay themselves
How you pay yourself depends on how your company is set up, so work with a CPA to get it right. In broad terms, an owner can be paid for two different things. One is the work you do. If you're running the company as CEO, that role has a market value, and many owners are paid for it through payroll as a salary. The other is your return as an owner, which can come out as owner's draws or distributions depending on your entity type. Draws and distributions aren't necessarily the same thing as this period's profit, and how they're treated depends on your structure. If you own an S corporation and work in the business, the IRS expects you to pay yourself reasonable compensation through payroll before taking distributions, and what counts as reasonable depends on the work you actually do. The IRS guidance on paying yourself is a good place to start.
How much should you pay yourself? That depends on the work you perform, what that role would cost to hire, what the business can support after payroll, taxes, vendors, and debt, your own financial needs, and the company's obligations. A practical place to start is two numbers: what it would cost to hire someone to do your job, and what the business can pay you without putting payroll, taxes or vendors at risk. If those numbers are close, set your pay and treat it like any other payroll obligation. If they're far apart, that gap is what the rest of this article is about.
Profit, cash, and your paycheck are three different questions
When an owner tells me they can't pay themselves, I don't start with their psychology. I start with the business, because "I can't pay myself" can mean three different things, and the fix depends on which one.
First, is the business profitable? Does it earn enough after its real operating expenses, including a fair cost for the work you do? Second, does it generate enough cash? Profitable companies run short of cash all the time because money is tied up in receivables, inventory, debt payments or growth. And a company can have cash in the bank while losing money, because it borrowed, delayed paying vendors or took customer deposits. Third, can it support appropriate owner compensation? Can you be paid reasonably without jeopardizing payroll, taxes, vendors or the company's stability?
There's one more question I'd ask, because it's easy to miss. Your P&L may show a profit. But if you're working 60 hours a week and not paying yourself, what would the numbers look like if the company had to hire someone at market rate to do your job? The business may look profitable only because you're not counting the value of your own work. In other words, you may be subsidizing it with unpaid labor. Are you building a profitable business, or are you subsidizing an unprofitable one with your own time? Sometimes that's a deliberate short-term investment, and it can be a good one. Sometimes it's a pattern you've stopped noticing.
What changed the economics for me
When I finally fixed my own situation, I didn't do it by working harder or cutting my personal expenses. I changed how the business operated. I rewrote my contracts and moved our payment terms from 120 days to seven, and in practice customers paid us in 14 to 21 days. I raised prices and found a niche. When customers asked why they should accept the new terms, my answer was that we provided a premium service. Over nine months our margin went from 16% to 26%, and that improvement is what let us pay down the $600,000.
Some owners use systems like Mike Michalowicz's Profit First to set money aside for profit and owner pay on purpose, and making those allocations deliberately can be valuable. Whatever system you use, it still depends on sustainable margins, enough cash coming in and sound financial management.
Sacrifice or avoidance?
Many entrepreneurs take real pride in paying everyone else first. Employees get paid, vendors get paid, customers get served, and the owner goes without. Sometimes that's exactly right. In a crisis or the early stages of a business, it can be the responsible choice. And some obligations come first no matter what: payroll, taxes and commitments the business can't responsibly ignore. Nothing here suggests paying yourself ahead of them.
But there's a point where sacrifice can become part of the problem. An owner can feel responsible for protecting the team while putting off the decisions that would actually fix things: raising prices, dropping an unprofitable customer, restructuring debt, addressing an employee who isn't performing. The behavior that feels responsible can be the thing keeping an unsustainable situation going.
I don't assume that's what's happening. Plenty of owners have already raised prices, chased collections and cut costs, and the cash still isn't there. Some are deliberately reinvesting in growth. Others are dealing with real contractual or competitive limits. But sometimes it's easier to keep sacrificing your own pay than to confront the pricing, customer, staffing or leadership decision that needs to change. The question is whether you're making a deliberate financial choice or avoiding a difficult one.
Here's how the two can feed each other. Customers pay slowly, so you're short on cash. You don't renegotiate the terms because you're afraid of losing those customers. So the cash problem continues, and you keep skipping your paycheck to cover it. Telling that owner to "improve collections" doesn't help much. The useful question is why they've kept accepting terms that are hurting the company.
The cost isn't only financial. Many owners started a company for freedom and financial independence, and find themselves working harder than ever for little or no pay. That cost lands on time with family, personal financial security, health and relationships, and on the spouse wondering why the business that takes all your hours doesn't pay the mortgage. Some people accept that deliberately for a season, toward a goal they believe in. That's different from drifting into it. If your business requires your time, energy, financial risk and personal sacrifice but can't provide the life you want, what exactly are you building?
The CEO can't delegate understanding the numbers
I brought this lesson from Diversified into my coaching practice, but I didn't always apply it. After losing several coaching clients over money in a short stretch, I realized I'd been letting clients drive our conversations, and with one of them we'd talked about everything except his business. Now I ask every client the same question: how are you doing financially? One client I never would have worried about said, "It's been tough." Another, a CEO, hadn't looked at his financial statements in four months. He'd delegated the finance work, which is fine. He'd also stopped looking, which isn't. That isn't delegation. Delegation still includes looking at the numbers. You don't have to do the accounting yourself, but you do need a reliable way to know how the company is performing and where its cash stands.
What to do next
Start with visibility, and match it to your situation. Years ago, when our outsourced bookkeeper kept delivering the numbers late, my brother called her and told her you can't fly a plane without the odometer. Monthly financial statements tell you how last month went, and every company needs them. But if you're worried about making payroll, last month's P&L isn't enough. You need to see the cash you'll have next week. That can mean a weekly cash review, a rolling 13-week cash-flow forecast, and a regular look at receivables aging, payables, upcoming payroll, tax obligations, and debt payments. A company with strong reserves and predictable cash may not need that cadence. A company in a cash squeeze does.
Then manage cash on purpose. One company I worked with had a payables person paying every bill the day it arrived, because that's how you pay bills at home. It made sense, but it drained cash they needed for their slow season. The answer wasn't to stop paying vendors. Sometimes paying early makes sense, for a discount or a relationship. Other times it gives away cash you don't need to give away. The point is to manage payment terms, vendor relationships, and liquidity with a deliberate strategy, not run the business like a household. In their case, we added monthly calls with their accountant, and he walked them through the numbers every month.
Set your reserve the same way. A common rule of thumb is a few months of operating expenses, but the right amount depends on your actual risks: how fast cash comes back to you, your debt, your seasonality and your payroll. Owners who've lived through a cash crisis sometimes become reluctant to spend afterward. Sometimes that's fear. Often it's simply prudent. What matters is that the decision is intentional and supported by the numbers.
Then decide what the numbers are telling you to change, and when you'll change it. If margins are thin, what has to change about pricing, costs, or your customer mix? If receivables are slow, which conversations or contract changes need to happen? If you haven't reviewed your financials in months, what process will make sure you do? If the business only works because of your unpaid labor, what would it take to build a model that pays you appropriately? And if you've realized you're avoiding a conversation, when are you going to have it?
So here's the question I'd sit with. If your business could only pay you what it's paying you today for the next three years, would you keep running it the way you're running it now?
If the answer is no, what decision have you been avoiding that could start changing the economics of your business?
That's worth talking through with someone who'll look at the real numbers with you, whether that's your CPA, a Forum mate, a mentor or your spouse. Or it could be me. Let's talk.
Here when you need me, Todd
FAQ
Should I pay myself a salary or take an owner's draw? It depends on your entity and your role. Owners of some entity types take draws, while S corporation owners who work in the business are expected to take reasonable compensation through payroll before distributions. A CPA should help you set this up.
How much should I pay myself? Look at what your role would cost to hire, what the business can support after payroll, taxes, vendors and debt, and what you need personally. If those numbers are far apart, the gap usually points to pricing, margin, cash flow or collections.
Why is my business profitable but I can't pay myself? Profit isn't the same as cash. Money can be tied up in receivables, inventory, debt payments or growth. Your profit may also be overstated if you aren't paying yourself for the work you do.
