Skip to main content
_FB_2018-Icons-finalized-cleaned-up_new_FB_2018-Icons-finalized-cleaned-up_newGroup 9
Back
Scroll to top

Take Home Pay Vs. Retaining for Future Growth

John Harrington's headshotLast month, First Bank’s John Harrington, Western Region Senior Credit Analyst, continued his insightful series with a discussion about the factors that go into determining how much business owners should pay themselves. In short: business owners should balance their pay with the capital needs of their business in order to grow. In this new article, John digs deeper and provides the top three questions a business owner should ask themselves before determining what they should pay themselves.

Q1: What are the goals for growth?

Rather than blindly deciding what to do with capital, every business owner should start by determining what their aspirations for growth are. Is it simply being able to hire someone one day to do the job for you or do you have long-term growth plans to become a regional brand?

The ultimate size a business owner wants to grow their company to has a direct impact on both the amount of capital needed to be retained and the time needed to retain it. It may be possible for a small company to double in size in the next 12 months, but to grow into hundreds of employees will usually require several years of discipline.

Q2: What needs to be saved for and what can be financed?

Not all growth goals need to be funded with cash. First Bank is here to help and may be able to provide financing to help get you there.

Say a part of your growth plan includes purchasing a building, allowing your company to build equity within the property rather than continuing to pay rent. If you need a $300,000 building, that doesn’t necessarily mean that you have to save up that much capital. For example, if you were to secure financing for 75% or even 80% of the cost, you could adjust your savings goals accordingly. Instead of saving $300,000, now you just need to save $60,000. This drastically shrinks the savings timeline and frees up a greater proportion of capital along the way to be spent on other things.

Q3: When does growth become not worth it?

At a certain point, it stops being worthwhile to grow. Economists call this diminishing returns.

As a business owner, you need to evaluate how big and complex you want your company to be. Would you be happier managing an office team of 30 that effectively serves only your immediate community or would you want to grow to 200 employees across three states? How big can the company grow before you get overwhelmed and the increased cash flow stops being worth it? The answer differs from owner to owner and is worth considering as you set your goals.

Key Formulas

Factoring these three questions into your plans will help you plan the monthly amount of capital retention that can build the needed equity in the correct timeframe. Any cash flow over that amount is what you could pay yourself.

While this exercise does not have to be repeated monthly, it is worthwhile to evaluate your growth goals and the allocation of your cash flow frequently-at least yearly-to make sure that you are still enjoying the maximum return from your business. A formula for this concept of financial management is provided below.

  • Capital need for growth goal / Time = Capital retention plan
  • Cash flow – Capital Retention = Business owner’s potential income

Trending Topics

First Bank is One of the Top Banks in the U.S.A.

When searching for the top banks in the U.S., it is often smarter to work with a small community bank over a national bank. Small banks often have deeper connections to the community and are invested in the success of...

Commercial Financing

Finding the right commercial financing is easier said than done. If you’re starting a business or trying to grow, finding the right option can be a tough task. Learn more about different commercial...

Where To Get 20 Year Mortgage Rates

When you’re ready to buy a house, it’s easy to get caught up in all of the excitement of shopping and forget about the financial part. Once you’ve found the perfect house, the first thing you may be...

Where Can I Get a Personal Loan? – Think First Bank of Asheboro, NC

If you’re looking to get a personal loan in Asheboro, North Carolina, be sure to visit First Bank. Whether you’re looking to finance a wedding or put a down payment on a house, First Bank has a variety of...

Best Personal Loans in Albemarle, NC

Are you in the market for an engagement ring and looking for a place to get the best personal loan? If so, you may need to take out a personal loan to finance it. While most major jewelry stores have financing...

FHA Loans 101: 3 Major Requirements

If you have a strong understanding of the FHA loan requirements, you’ll experience a quicker and smoother loan application process. FHA loans provide homebuyers of all income levels the opportunity to purchase a home...

How Much Should a 40-Year-Old Have Saved for Retirement?

Are you 40 years old and concerned about your savings? Just how much should you have saved for your retirement by now? There’s no precise answer to give you, but there are some savings recommendations based on...

Small Business Startup Loans in North Carolina

If you have a good idea and a little bit of business savvy, a small business startup loan can serve as the cornerstone to your fortune. Whether it’s a traditional business loan, credit line, commercial mortgage,...

What is the SBA?

If you have a business plan but are having trouble acquiring a bank loan, consider reaching out to the Small Business Association (SBA). The SBA is a government-affiliated organization that provides small businesses...

High Interest Checking Accounts – Wilmington, NC

A high-interest checking account keeps your earnings coming long after you’ve put it in the bank. Wilmington, NC, has five First Bank locations with high-interest checking account options. Checking Account Options at...