ABMP Financial Literacy Series
In the March/April column of the Mind Your Money 2020 series, we covered how to track your massage business expenses.
We work as massage therapists because we love it, but at the same time we want to make money because we like to eat and put gas in the car and keep the lights on. Since many of us have questions about the actual take-home money part of business finances, let’s get real about paying ourselves in a massage business—starting with cash flow management.
Cash flow management sounds kind of tedious—maybe even a little complicated and scary—but what is it really? Cash flow management is a flexible system for making decisions about your money. It is not a set of rules or even a strict budget.
Good cash flow management begins with thinking about your priorities and what you want your money to do before it comes in. Then, you can adjust the plan as you go so it continues to serve you and your business well. To fully embrace good cash flow management, we first need to slay a big money myth: gross income matters.
Myth: Gross Income Matters
I’m sure you’ve seen plenty of resources that promise to teach you how to make $100,000 per year—or more—as a massage therapist. These resources come wrapped in claims of freedom from financial stress, plenty of vacation time, and encouragement to “let your business work for you, not you for your business!” While many of these resources have great business-building ideas, the advertising is pretty scammy because that $100,000 is referring to gross income. And gross income is a terrible metric to count on because gross income is the total amount of money you receive providing your service before expenses.
You could make $100,000 providing massage, but if you have to spend a huge portion of that income on rent in a fancy neighborhood, utilities, a slick website or marketing specialists, linen service, advertising, dues to networking groups, and all sorts of other expenses, you’ll only take home a small portion of that income. A gross income of $100,000 is not so glamorous if you spent $50,000 to make it and only take home $39,000 after taxes. Gross income only matters in relation to the amount of it you take home. The number that really matters is the owner’s draw—the wage you pay yourself.
Owner’s Draw: Intentionally Paying Yourself
In sole proprietorships and LLCs, the amount of money you pay yourself is called an owner’s draw. (In a C or S corporation, you would pay yourself a salary, but the ideas that follow still apply.) Sadly, many massage business owners don’t intentionally decide how much to pay themselves. They take in money, pay the bills, and then pay themselves whatever is left. But intention is just as important in business finances as it is in hands-on work.
“How do I pay myself?” is the most common business money question we get, and the answer can be as complex and varied as our massage businesses. But the answer always begins with intention. Your owner’s draw should not be the remainder, it should be a well thought out intention.
You must pay yourself. You need food and shelter. You need the fulfillment of seeing a tangible result of all your hard work. Unless and until you are taking an owner’s draw, you can’t make educated decisions about your future and the future of your business.
If you are not taking an owner’s draw from your business, you don’t have a business. You have a hobby—probably an expensive and stressful hobby. It’s OK if massage is your hobby and you don’t need to draw an income. But be clear about that and make your decisions accordingly. Most of us count on and enjoy income from our businesses, and our finances should be handled with that in mind. There may be a few weeks or a month when you first open your business and you do not pay yourself. But this should be very short-term, and again, intentional.
Manage Your Cash Flow to Pay Yourself First
There are several ways to decide what your owner’s draw will be and how to manage your cash flow. In general, we advocate for always paying yourself first, setting aside money for taxes next, and paying bills last. If you haven’t been doing this, it can seem utterly impossible, but we’ll talk through a few ways to get started, and we’ll demonstrate this approach in the video.
First, look through the last several months of income and expenses. You should have a rough idea of how much money you take in and your total expenses. Have those numbers handy. We learned about the ideal bank account setup and tracking income and expenses in the first two columns (catch up at www.abmp.com/money)—now it’s time to put that into action.
Decide what to pay yourself by considering the needs of your personal budget. Are you OK getting paid a varying amount every pay period or will you do better with a consistent amount? If you are comfortable with a varying owner’s draw, you can configure your pay as a percentage of your gross income or a certain dollar amount for every massage you perform. If you prefer a consistent amount, pay yourself that same amount each pay period and set aside “extra” funds on the weeks your gross income is higher to cover the weeks when your gross income is lower.
If this sounds tricky, don’t fret. You can watch our demo video and get the customizable spreadsheet at www.abmp.com/money.
Set Up a Payment Schedule
It helps to manage your money on a regular schedule as a ritualized task. Schedule it at the same time weekly or twice a month. Put on some lyric-free background music if you’re into that (I’m a fan of the Harry Potter soundtrack) and get into a money groove.
Take a look at how much money you’ve taken in since the last time you paid yourself. That’s your gross income. Now, pay yourself. Again, you get to decide if you pay yourself a percentage, a certain amount for each massage performed, or a flat amount each pay period. Write yourself a check from your business checking account and deposit it into your personal account or set up an electronic transfer.
After you pay yourself, set aside a percentage (or flat amount) of your gross income for taxes. Your accountant or tax preparer can help you figure out what percentage, but if you already know what to pay for quarterly estimated taxes, divide that evenly according to the amount of pay periods between now and the due date for quarterly payments. We strongly encourage you to move the money for taxes into a separate savings account. Do not skip this step. Do not think, “Oh, I’ll just set more aside next week.” Do it immediately before you are tempted to spend it on something else. It really helps to think of this as the government’s money and you are just holding it for them.
You could also do what a great employer does: plan for sick days, vacation, and retirement. If that’s important to you, set that money aside just as you did for taxes.
Finally, the remaining amount of your gross income is what you have to spend on operating expenses, paying the bills, and buying the things you need to run your business.
It may take some time to figure out exactly what proportions will work for you and your business. You may find that after paying yourself and setting aside tax money, you don’t have enough to pay your bills. You have choices. You can lower your owner’s draw, lower your expenses, or earn more money.
If you are not dependent on income from your business, it can be tempting to simply decrease your owner’s draw. But are you running a business or funding a hobby? There’s no wrong answer, but be clear in your purpose.
Plan to Expand Your Profits
Seeing the numbers in action can help motivate you to market your business and get more clients. If you’re paying yourself using a flat amount each time, your motivation comes from expanding that profit gap so you can reinvest in the business. If you’re paying yourself on percentage, your motivation comes from increasing your take-home pay. Understanding what motivates you can also help you decide which method to use.
When you get good at figuring out the proportions that work for you, think a little bigger. Do you want to save a little from each pay period to build up a vacation and sick pay buffer? See where you can squeeze out another five percent, or consider how much more you would need to earn to make that happen.
Getting clear about your business finances, especially when the cash flow includes a regular income for you, is illuminating. Whichever method you choose, approach it with intention. You are running a business, providing a valuable service to your clients, and you deserve to be compensated fairly.
Allissa Haines and Michael Reynolds can be found at www.massagebusinessblueprint.com, a member-based community designed to help you attract more clients, make more money, and improve your quality of life.