Pay Yourself First Principle

Working with micro-business owners over the past 7 years, I’ve often been surprised when owners place their own compensation last in line behind others and misguided beliefs. The Pay Yourself First principle is an essential concept every micro-business owner needs to fully understand and to integrate into their everyday thinking about their business or startup.

Some will read this and think that’s a no brainer and others will read this, feel an uncomfortable jab, and will want to read further. This article is both, but mainly for the latter.

Obviously, if you are a bootstrapped startup, and most micro-businesses are, there is no cash flow and no compensation to be had at first. Surprisely, this is where the Pay Yourself First principle is absolutely critical to your business strategy. Many micro-business startup owners are looking for salary replacement (i.e., I want to make what I earned in my last job.) You may have a goal that

In the case of a startup, the Pay Yourself First principle would state that your most important task is solving your salary replacement problem. The Pay Yourself First principle is how you approach all decision-making.

The Pay Yourself First principle may sound selfish to some readers. However, as a micro-business owner, you owe it to yourself, your family, your employees, your stakeholders, and most of all, your customers. If you can’t provide yourself a fair wage and a fair return on your business and you go out of business. It impacts negatively everyone associated with your business.

Don’t compromise your goal. Of course, you most likely won’t make your replacement salary amount in the first month. However, that should still be your primary object prior to launch, and for each month subsequent to your launch.
When you are an employee, you capture value mostly from your compensation (salary, bonuses, benefits, etc.) When you own a micro-business, you’ll capture value from the activities that you do on behalf of the business and capture value from the inherent value of your business. The best way to think of the value of your activities is by understanding the fair market value of those activities (i.e., what you would have to pay others).
You need to understand how you define value. Value can be extrinsic or intrinsic. Extrinsic value is the monetary value you derive from your business such as your compensation, cash distributions, and the growth of business value (i.e., the amount others would be willing to pay for your business.) Intrinsic value, which, interestly, will also impact the extrinsic value of your business. It includes things such as customer loyalty, your systems, your competitive advantages (i.e., why customers purchase your product and services), etc.
Don’t get trapped in thinking that if you build a beautiful product or services, others will come. It doesn’t work. If you don’t believe me, try this experiment. Bake a beautiful cake. Place it in your cupboard. See if you get any customers. You are probably thinking that that is the dumbest thing you’ve ever heard. You absolutely right, however, essential that the behavior I’ve encountered working with micro-business owners. A business (the seller) is primarily an entity selling a product or service to customers (the buyers.) If you don’t want to be a seller, then you should focus on getting a job (an employee) or getting contract work (an independent contractor.)
Don’t get trapped into following the lead of everyone (micro-business owners) in operating their micro-businesses. It is like following another car going the wrong way on a busy highway. You’re going to get crushed. The fact the other car is crushed, as well, won’t give you much comfort.
Understanding value as a micro-business owner means understanding the value of the labor you contribute to your business and the non-compenstory value that you should be able to derive from your business. In addition, you need to understand value from the standpoint the various stakeholders (employees, third-party services, vendors, and customers) and the resources that your business requires (buildings, equipment, systems, technology, loans, third-party investors.)

Understanding your definition of value will take time. And like starting a running habit, it can be painful and frustrating at first. As the saying goes, No Pain No Gain. Over time, what you consider pain now, will become enjoyable.