In the beginning, Erik was very hesitant to take money out of the business because he didn’t have confidence in what he was doing as a business owner. In this episode, Erik shares the different ways to get paid as a business owner.
Erik J. Olson (00:01):
Ways that you can get paid as a business owner. What is happening? This is Erik J. Olson. So let’s talk about you paying yourself and if you’re an entrepreneur, you’re the operator of a business. There’s, there’s a bunch of options for you. Lots of different ways that you can go about getting paid. You know, a lot of people. And I did this in the very beginning. I was very hesitant to take money out of the business because I didn’t, I didn’t really understand the business that I started. What I mean by that is like, I didn’t understand. I didn’t have confidence in what I was doing as a business owner. And I was always afraid that I was going round of money. So in the very beginning I left like all the money in there. And I would just pull basically, as I needed, based on the individual personal bills that I had to pay.
Right. So like if the mortgage was due, I’d pull out some money to pay the mortgage. If like a electrical bill was due, I’d kind of pull out some money and I’d probably, you know, I’d pull out a little bit more than I needed. So I always had personal money. But I didn’t pull a lot out of the business. I just, I wasn’t sure how much I needed to pay myself or should pay myself and how much I needed to stay in the business. And I knew I needed to build up the business, but that sucks because it’s very stressful to not have a lot of, to not have money in your personal bank account. And then especially if you have a family, which I did when I started this, like, I, I didn’t like they didn’t know, like when I was gonna like pay myself.
And so I was very non-committal to paying myself and what I ended up doing was eventually getting on payroll. So, so definitely what I would say is get yourself on payroll sooner, rather than later. Now that’s how you get the money out of the, out of the business. And over to you, you can also take distributions. This that’s a completely different kind of episode. But what I really wanna talk about is like, how do you actually make the money first? And there’s a couple different models that I wanted to touch on. So what I mean by that is like, how do you bill for your time or your projects or whatever. And I’m not talking about like technical, like what tool to use different, different models, billing models. So let’s start with the basics and I’m gonna share with you my experience, right? Basic ways to make money as a entrepreneur, especially in a, well, probably only in a service based business like mine. So right now we’re a digital marketing industry. We don’t sell a product, you don’t buy something physical from us. You buy a tangible service over and over and over again. And so like, one of the ways that you could do this is you just bill by the hour. So you set a rate I I’ll make something up. Actually, you know what most brand new brand new entrepreneurs, most of them in charge about $50 an hour. Why $50 an hour? Cause they do the math and they’re like, all right, well there’s
Erik J. Olson (02:59):
40 hours a week. There’s 52 weeks a year. That’s about 2000 hours that I can work in a year. And if I charge 50 bucks an hour and I work full time, then I’ll make a hundred thousand dollars an hour, which is like this nice round number. And so that’s usually where the billing rate starts. And then over time they’ll be like, I need to make more. So they’ll bump it up to 65, 75, 80 $5 an hour. And it’ll kind of, it’ll just stay there for a while until they get a lot of confidence, a lot of clients, whatnot, but you’re billing by the hour. So what’s nice about that is it’s basically risk free as far as like, you know, you take it on the risk of the project. You almost don’t even really need to evaluate a project. You just need to know like generally speaking, what is it y’all want done?
And they’ll tell you and be like, yeah, I, I do that. I do that kind of work. I’ll work on it by the hour. But if something happens in the project where you’re like stuck and it takes a lot longer for you to, to, to build it out, to do the thing that you said you would do, and that’s not really your problem, that’s their problem. Cuz they’re paying you by the hour. Right? So they have the risk of how many hours you’re going to bill. So that’s, that’s nice. Also you don’t have to spend like hardly any time. If, if any, at all scoping out a project, you just say, yeah, I I’m, I’m a, I’m a software developer and, and I can do software development. So I’ll do software development development for you. And then you can figure out like what the scope of the project is, but you don’t don’t really care as long as they’re gonna pay your rate.
So it’s, it’s easy. It’s low risk. The downside here is you only get paid if you work. So if you go on vacation as an example or you get sick or you just don’t feel like working or whatever, you don’t get paid, that’s a problem. Right? Another thing is that it’s very difficult to scale that kind of business. How do you scale your business? How do you do more when you bill by the hour? Well, you have to hire more. You have to have more hours, which means you have to hire people. You can only make money if you work right for the time, you’re trading time for dollars literally. So that that’s very limiting. Now the next kind of phase that people go into is project base or fixed price. So with fixed price, you don’t build by the hour. Instead you look at the project in the beginning and you tell them how much it’s gonna cost to build the whole thing out.
Now, the idea here is that you can pro since you’re good at this point at what you do at your craft, you could be very efficient, more efficient than the, by the hour people, right? So you may have like frameworks that you’ve built. You may have processes and you automation and you can get like a lot of work done in a short amount of time versus the guys that do it by the hour because they’re doing it all manually. And they’re kind of newer to the game, if you will. So with fixed price projects, what’s nice about that is you could spend a lot less time on a project and
Erik J. Olson (05:57):
Still give them the same value. So you can still charge the same, but maybe spend half the time that that other people would on it because you’re, you’re better now. You’re better than, than, than most other of your competitors. So that, that’s the idea. There’s a potential to make more. There’s also, it’s a little bit easier to scale cause you’re not trading time for dollars. But the risk is on you, right? So if you’re like, oh yeah, I could do that. No problem. And then you’re you run into that same problem that I described before. Well, instead of you just bill by the hour bill by the hour bill by the hour until you figure it out. No, no, no, no, no. You’re working on it, but you don’t get to charge any more money cuz you said you would do it. Now.
The other downside is that in the beginning of a project, you have to scope it out. You have to spend time and energy to figure out exactly what this project is. And it it’s up to you. It’s imperative that you write it all down. This is exactly what’s included. This is exactly what’s excluded. If you’re smart, you’ll have exclusions. Then also another thing that you have to do and you have to explain this to your clients. If they want like a fixed price in a fixed price scenario, when you come, like let’s say you get the job and you’re working it and you come across a change like, like when the client’s like, Hey, could you just throw in this thing, you have to scope out that change and you have to submit a change order for it because it’s fixed price. So if you just keep adding more and more scope, more time to the project, but you don’t change, you don’t change the price, then you’re not doing fixed price.
You’re just, all you’re doing is you’re agreeing on a price and you’re, and the scope is variable. That’s not a good place to be. Even if you’re going to do something for free. When you have a fixed price project, you should submit a zero cost change order. Right? And that way, at least the client’s aware that you’re doing something more than you or different than you said you would, but you’re gonna waive the fee. Now that’s important because the second time, the third time, the fourth time they asked you to do something for free. You could, you could point back to the first, second, third, no cost change orders and say, Hey man, look, I I’ve already done two or three of these and no cost. Like, I’m sorry, but I, I, I have to charge you, right? I have to give you a change order.
So that’s the downside of that kinda work. Now, the next thing that I graduated to was recurring revenue with recurring revenue. You agree on a scope of work that is gonna happen over and over and over and over again because you have recurring services. That’s what we do here at Array Digital. So we defi we define effectively the product that we’re going to provide and we provide it over and over and over as a service that’s recurring revenue. So we agree to the scope. We agree to the price and we agree to a minimum timeline. And then we just do it over and over and over again. So think about like an easy example is
Erik J. Olson (08:55):
Social media management. So we’ll say, Hey, it’s gonna cost you X number of dollars and we’ll post on your Instagram Y number of times a week. And, and then we just do that. We just continue to do it every week. We post, you know, the same number of, of posts and we charge a certain amount every month. It’s great. I like it a lot. Now there’s downsize, right? Because one of the downsides is that, well, unfortunately at some point recurring revenue is going to end for that client at some point, for whatever reason, they’ll probably move on to a different solution. They’ll get this happens a lot too. We found out over the years whenever there’s a merger or an acquisition, it usually means that it’s kind of an end of the client. New people coming in, they’ve got different ideas about how it’s done.
They’ve got their own people to do it. Who knows, but at some point the recurring revenue demand, but of all the models, I really like recurring revenue. And in part, actually one of the thing, Hey bonus, a bonus, right? One of the things that we are working on now is a combination of recurring services and recurring revenue and projects, a hybrid of the two. And what I mean by that is have a recurring revenue base from your clients. Basically every client’s gonna pay you something on a recurring basis, but then you inject in projects on top of that. So that’s where we’re going. All right. So that’s my experience when it comes to how to charge for your time, effort, money, how to pay yourself as well as a result. I hope that was helpful to you. Because as an entrepreneur, as an operator, you, you gotta make sure that the money’s coming in and you gotta make sure that you’re getting you personally are paying your bills and, and benefiting from it.
If you have any questions about that, hit me up on Instagram. That’s where I hang out a lot. You can find me there @erik.j.olson That’s E R I K dot J dot O L S O N. Hey, and what do you do me a favor? Would you do me a favor? We have been publishing these episodes for years. We don’t charge anything. Right? We’re giving away amazing content for free. Would you tell a friend, an entrepreneur friend about our podcast, right. Would you tell just one more person we wanna actively grow this podcast and I could use your help. Please tell a friend about the Journey to $100 Million.