Retained earnings vs salary

[jenscandles]

Hi! I’m wondering what kind of percentage split you put on your net profits so that you have a salary but also keep some retained earnings. I have enough markup on my candles to cover labor and overhead, but if your net profits for the week are $100 because you sold only a few units and you want to expand at all someday it’s hard to pull all of that as salary. Just curious how some of you split that?

Thanks!

Jen

[WhitePineCandle]

To the latter point about expansion, you'd likely need a business loan, depending on how much you want to expand and how quickly.

[jenscandles]

Thanks. I am expanding slowly using no debt. I'm working to become debt free in my personal life and will not be extending debt into my business life. I've seen too many businesses close lately due in part to their debt load.

This is why having retained earnings is important to me. I just can't decide a percentage right now...

[jenscandles]

Maybe I'm not asking my question right? I'll explain a bit further...

I, like many others, am working full time and am making candles part time. The initial money being fed into the candles is coming from my full time job. My plan is to not take a salary from the candles for the first 6-12 months while I build up cash in the business. The cash in the business obviously needs to come from the sale of the candles (rather than from my job) in order for the business to be viable long term.

The next short-term goal of my plan is to be pulling enough salary out of the business that I can cut back to part-time at work. When I get to this point I can't take all of the net profits as a salary draw because it will drain the operating cash out of the business. Which brought me to my question - what kind of percentage split do you put on your net profits to pull salary out but still keep cash in the business? I used the term "retained earnings" before but a more accurate term at this point is probably "operating cash".

My long-term "dream goal" is to generate enough from the candles that I can stop working that other J.O.B. My rough calculations of how many candle sales that would take says I can't make enough candles in a given month for that to happen so we'll see.

In my last go around a few years ago, I did this wrong. I was feeding money into the candles from my job, but then kept the money from the candle sales as "mine". It resulted in no cash in the business and I eventually had to close. I learned from that mistake that this was a bad plan, and so I've formulated my new plan above.

And so now I'm just looking at how I can split the net profits later to have a reasonable salary and still keep cash in the business. Some of you have been in business for years and have surely made some kind of split like this to be able to keep operating.

Thanks so much!

Jen

[David Fields]

Wow, I don't know how to start answering your questions. Unfortunately, in my opinion your business is too small to really even think about retained earnings. Without going into debt, you will really need to be plowing every dollar earned back into the business. Greater profits means you can invest in other products and take advantage of buying in larger volume to get lower prices; also, you can invest in equipment that will save time. All of this is designed to increase your profitability and productive capability which hopefully will translate into greater sales. Taking profit out now will slow your growth a lot. As far as your long term goal, back into how large your sales have to be for you to quit your job and go full-time. Yearly amount you want to put into your pocket plus cost of goods sold plus expenses (really variable number here... full-time craft shows? or full-time wholesale? or a brick and mortar store? or web sales only? or a combination of these taxes, labor, insurance). Now, what's your plan to achieve this large number? HTH

[jenscandles]

Thank you for your input. "Backing in" was just what I was trying to do. I had calculated how many candles of one type/size I would have to sell in a week to earn $X based on if I was taking 1/4, 1/3, and 1/2 of markup as salary. Needless to say, at 1/4 markup I can't hardly make enough candles to do it. At 1/2 of markup it's a much smaller quantity but that's a large percentage over hundreds of candles. At 1/3 of markup as salary and keeping 2/3 in as operating cash, I'm probably close to a good split.

Definitely not taking anything out for the first year or two. I had a similar conversation with my future MIL who has owned and operated her own frame shop for 25+ years and she informed me that I'm likely looking at 3-4 years before I can realistically start taking anything out.

Thanks all,

Jennifer

[NewOrleansLady]

Actually you can't figure out your profits until you figure out all your expenses. You'll need to see where you are in a couple of years. Will you have gotten big enough to move making them to a larger place...so now you have rent, insurance, phone, utilities. Do you already have yourself set up with vendors license, tax collection, etc? Will you accept CC?

As the business grows big enough for you to take a salary more responsibilities and liabilities crop up along with it. Don't forget to have your social security and all payroll taxes taken out with your salary so you have to be set up with the feds and state.

Lot more involved than just a percentage of a candle sale.

[jenscandles]

You are right; I did not consider rent and things. Even if I stay in the kitchen or move to the basement the business will have to start contributing towards the increased utilities. It is hard to track how much of the increase is a result of the candles right now with the electric company taking 4 increases in one year.

I did consider SE tax; I've had to do that before. I've also handled sales tax, etc in the past.

Thanks so much for your input, I appreciate it!

Jen

Edited to add: NewOrleansLady, I'm really glad you mentioned rent and things. I admit that while I briefly entertained the thought of taking the candle making out of the house, I did not really consider it because I'm not planning on opening a retail store. (Of course that may change as plans change.) I suppose in reality it is very difficult to pour 12+ hours a day in the kitchen. Thanks for giving me great thoughts to consider.