If it costs you $7 to make a widget that you are selling for $5, you can’t make it up in volume. Unfortunately, if the owner isn’t compensating himself or herself, it can be difficult to know when the business model is profitable.
Further, if the owner is receiving compensation, the business can expand more easily.
Many very small businesses struggle with hiring a new employee. They just don’t have the cash flow to do it.
If the owner is receiving compensation, it can be reduced for a period of time. This will provide the business with cash to pay the new employee who is performing some of the work that the owner used to do.
The owner then has time to grow the company and replace his or her lost compensation.
In general, a business should start to pay the owner as soon as it can afford to do so.
A business can afford this when there is cash left over after all of the current liabilities of the business have been met, it is likely that future obligations can be paid out of projected revenue, and there are no investment opportunities that would require leaving cash in the business.
Obviously, in making these judgments, the owner will weigh his or her personal need for cash against those of the business.
