I believe in the concept of a minimum wage. The minimum wage that I’m referring to is not THE minimum wage–federally or state mandated for employees. The minimum wage I’m talking about is a minimum wage for business owners. You see, for many small business owners the Federal minimum wage would be a raise in pay. For some, it would be an immense raise in pay.
Let me use some examples of this from my own long and interesting career. I started work at the tender age of ten or eleven. My first job was babysitting. My pay varied greatly and often amounted to whatever was left in a neighbor’s pocket after the bar closed. My second job was working on a farm where I earned my money based on productivity in the bean field. I well remember working all through August to earn my first $20 bill. My third job was a huge step up since I earned minimum wage and had regular hours. Minimum wage at that time was $2.30 an hour.
What I realized at that young tender age was some jobs paid better than others. So, I started figuring out how to get the jobs that paid better. And that led me to discover that the jobs that paid better required more skills. So, I learned more skills. And more skills. And more skills. Until finally I could make a good living.
And then I became self employed. My pay was whatever was left over after the expenses of the business were paid. Sometimes $2.30 would have been a very welcome pay increase. Obviously, this is not a sustainable existence. (It IS obvious, right?)
Flash forward many years.
In my accounting and consulting practice, I’ve worked with scores of business owners. Many of them were not making a living wage. They did a great job creating good paying jobs for their employees, but they did it at the expense of their own financial health and sanity. Let me give you an example of how that looks from a numbers perspective.
A starry-eyed man, we’ll call him Joe, decides to start a business. To cover his starting costs, he empties his 401k account, uses his house as collateral for a home equity line, and maxes out his credit cards. Let’s say he needed a modest $50,000 to get the business up and running. Here’s the financial impact of that business startup:
1. The money from the 401k account is now no longer producing any interest or dividends, and has a tax penalty and expense.
2. The equity in his house has disappeared, he’s worth less and has more debt.
3. His credit card has increased his debt, plus added interest expense.
4. His cash flow is impacted by the payments on the home equity line and credit card.
5. The $50,000 ends up costing far more due to lost income and increased debt and expense.
Now, check out the various percentages attached to business failure rates. Depending on the source, Joe has a 5-15% chance of succeeding. An 85-95% chance of failing. Frightening odds when everything Joe owns is now on the hook. And then, let’s say the cost of starting the business ends up being $55,000 factoring in lost income and increased debt and expense. Now, let’s say Joe wants to get back that money over a three year period. Joe needs to pay himself about $350 a week to make that happen. This is before he even begins paying himself a living wage.
Meanwhile, Joe’s credit score has dropped because of his added debt and his iffy income. This makes him less able to get more credit if he needs to buy a vehicle for the business (or himself.) And every time he does make a profit in the business, the government takes a chunk of it for taxes. It’s a bleak financial reality for many small business owners.
Now, does this mean that small business is doomed? Does it mean anyone starting a business is a fool? I’ll leave that to you to decide. What I do know is that there is a far better way of doing business. A way that makes sure the business owner’s financial situation pays better than picking beans and taking the leftover change from mother’s night at the bar.
It all starts out with the business owner making the right choices for his or her own financial health. Can your business provide you with the return on investment you need in addition to making the minimum wage you determine you’re worth? Owning and running a business is a very difficult job. A job requiring a variety of skills and a huge investment of time and money. Make sure you are adequately compensated by structuring your business to pay you your required minimum wage. Anything less than that is an exercise in futility, financially speaking. Without that sustaining level of income, you can quickly find yourself wishing you could work somewhere for “regular” minimum wage. A few years in you may well be heading for the bean field to make ends meet.
Want to learn more about how to build a business that is worth more than a hill of beans? Find out more about From Chaos to Control; my crash course in small business finances.