Three weeks ago, I finally reduced my hours at my regular job so that I’m working 8 hours a week instead of 48 hours. I’m using the extra time to take care of my mother, work on my Amazon FBA business and my website, rest, go on trips and get caught up with chores around the house.
It’s nice to be able to do all of the stuff that I didn’t have much time to do while working so many hours. So, yes, having extra time is nice but as a trade off, I’m taking a cut in pay. Even though my mom pays me a small weekly salary for taking care of her and I’m still earning 8 hours of wages from work, I’m bringing home less than what I was before.
Before going part-time, I told my husband that our household budget and bills won’t suffer because I could easily make up the loss of income with my Amazon FBA business. I am profitable but so far I paid myself only a total of $200.00 during my 18 months as a Seller. Like many of you, I used most of my earnings to purchase new inventory, supplies, ABC Boot Camp and other various service and subscriptions that I listed on my Resources Page.
As I want to keep the bills paid, I decided to start taking money out of my business to make up the deficit. Right now I’m not taking out very much but I do intend to increase my “paycheck” amount every quarter until I replace my missing income. Once that’s accomplished, my next large goal is to replace my husband’s salary so that he can quit his job and do something else.
In the remainder of this post, I’m going to share with you what I’m doing!
Most of what I’m doing is from what I learned from Mike Michalowicz’s book called Profit First. In this book, Mike teaches you what to do with your bank deposit money (Amazon payouts) so that you’re profitable and able to to pay yourself.
To get started, Amazon FBA profits are typically calculated with this formula:
- Sales – Amazon FBA Fees – Cost of Goods Sold – Other Expenses = Profit
Unfortunately, this gives you no plan for a paycheck and your profit (if any) is whatever is left over.
With the help of the Profit First book, I tweaked the formula slightly to this:
- Sales – Amazon FBA Fees – Cost of Goods Sold – Profit – Owners Pay – Taxes = Expenses.
What I like about this new formula is that it forces you to set aside money for profit, your paycheck and the IRS.
The amount of money that you allocate towards your profit, owners pay, tax and expenses is based on percentages.
Here are mine and a brief explanation of each account:
- 5% for Profit – each quarter, I’ll pay myself 1/2 of what’s in this account and save the other 1/2 for emergencies, a large inventory purchase or to pay for an annual subscription.
- 35% for Owners Pay – this is where I’ll get the money to pay myself twice a month.
- 15% for Taxes – this is for income taxes.
- 45% for Operating Expenses – this is for new inventory, supplies, subscription fees and credit card payments.
Each quarter, I plan on re-evaluating my accounts so that my Profit and Owners Pay percentages increase and my Operating Expense percentage decreases. Keep in mind that when you first start doing this, you don’t want to go crazy and start with profit and owners pay percentages that are too high and unrealistic for you.
Amazon Pay Day
Every two weeks, Amazon deposits my money into my business checking account. At this time, I set aside the sales tax portion of it since legally, the sales tax money isn’t mine to spend. Then I get my COGS number from InventoryLab and deduct that out from my deposit. Then with the remaining deposit, I use Excel to calculate how much money goes into each account.
As an example, let’s say $1020 was deposited today and $20 is sales tax and my buy cost was $500.00:
I then keep my original inventory money and the operating expenses portion in my checking account and transfer the rest of the money into my savings account. Using the example from above, $725 will remain in my checking account for inventory and expenses and $295 will be transferred over to my savings account. ($725 + $295 = $1020)
Mike does recommend having a separate checking or savings account for each of your separate funds, but I don’t want to open any more bank accounts at this time. For now, I use Excel to track the Sales Tax, Profit, Owners Pay and Income Tax amounts that are all saved in the same savings account.
Mike suggests paying yourself twice a month – on the 10th and the 25th. As I’m starting out small, I decided to pay myself just $50.00 each pay period. At this time, I have several “50’s” already saved in my Owners Pay account. I thought about paying myself more, but I would rather concentrate on building up my Owners Pay account first. Here’s my plan that I started last month:
August and September 2015: Pay myself $50.00 on the 10th and the 25th of each month. This money will come from my Owners Pay account.
October 1, 2015: Pay myself 1/2 of what is accumulated in my Profit account.
October, November, December 2015: Pay myself $100.00 on the 10th and 25th of each month. This money will come from my Owners Pay account.
January 1, 2016: Pay myself 1/2 of what is accumulated in my Profit account.
January, February, March 2016: Decide on my new paycheck amount and pay myself on the 10th and 25th of each month.
Though I’m calling the payment myself a paycheck, it’s technically not. As a sole proprietor, I’m paying myself back the personal money that I loaned my business to get started. I still owe myself just over $1100.
Once the $1100 is paid off, then I’ll be taking a “draw” which cannot exceed my profit amount. For example, if my monthly profit is $1000, I cannot draw out $1001.
Since I won’t be taking out the full $1100 this year, I decided to hold off on talking to my accountant until early next year at tax time. At that time, I’ll discuss with him about paying myself in more detail and see if I should switch business structures.
** Disclaimer: I’m not a legal professional so it’s up to you to make sure you take money out of your business correctly and legally!
But no matter what your business structure is, the principle of saving money for your profit, owners pay and taxes remains the same.
Why Using This Method Will Benefit You
So that you build a profitable business and get paid for your efforts.
I also believe that having a payment plan is important so that you don’t end up taking out random amounts from your business at random times. Just as a “real job” will pay you at scheduled intervals, you should do the same.
Plus, with Q4 coming up where many of us will be experiencing larger payouts, this removes the temptation to spend all of the extra money and not have any left over for a slower period down the road.
The BIG Thing I Gained Since I Started Doing This
I’m just into my second month into practicing the lessons from the Profit First book. Besides gaining a savings plan and a paycheck, I gained a different feeling towards my business. It’s kind of hard to explain, but I’ll try.
I’m a numbers person and I always did a Profit and Loss statement and analyzed my numbers. But up until now, they were just numbers. It really didn’t matter if I had a good or a bad month because I wasn’t paying myself. The money just stayed in my business checking account to buy more inventory, supplies and services.
Now, that I’m taking out a paycheck, I’m really forced to make sure I have the sales and profits to support it. Do I have enough sales? Are my COGS too high? Am I paying too much for subscription services? Am I profitable?
Even if you’re not ready to pay yourself, I challenge you to take your next deposit and allocate a percentage to Percentage, Owners Pay and Tax and see what you come up with. To be honest, I don’t make enough to pay myself a decent salary. It takes time and I know I’ll get there.
If you’re interested in learning more about building a profitable business and paying yourself, then buy a copy of the Profit First book from Amazon and start saving with your next Amazon payout.
As always, please feel free to leave me a comment or ask questions in the comment form below or on my Facebook page. I always enjoy hearing from you!