Self employed? Here’s how to avoid going broke when all your money is reinvested in the business

Yasameen Sajady, CEO of St. Paul-based Maazah, is learning that day by day, it takes awhile for profits to roll in.

The maker of Afghani-style chutneys, aioli and lentil dips is expanding into Target, Whole Foods and Costco stores across the country this year.

While a major opportunity, Maazah has to finance the increase in production before it can sell it to the new retailers and keep its dips rolling to the over 100 Kroger and Central Market locations, plus Kowalski’s Markets, it already supplies.

For small companies, growth opportunities like Maazah’s can put owners in a position where they are reluctant to pay themselves.

“When you’re dealing with these larger retailers, the purchase orders are so much bigger, you have to put so much money up front to buy supplies and bottles and the cilantro and ingredients, right? So you don’t really see the profits after just 30 days,” Sajady said. “It takes like 60, 90 days to kind of get above the line.”

Sajady is hoping Maazah reaches $2 million in revenue this year. It would help her and co-founder and sister Sheilla Sajady fully pay themselves. Right now, Yasameen Sajady pays herself enough to cover day care.

“The dream is to be able to have a full-time job with a full salary and get the company to a place where you can feel comfortable to [pay yourself],” Yasameen Sajady said. “But that hasn’t happened yet. This year is the year that will happen, if not next year.”

So how as an entrepreneur can you pay yourself when the business comes first? These business owners and advisers laid out a game plan.

One of the most important responsibilities for a business owner is budgeting.

Since 2018, Ahmed Mohidin, founder and principal adviser at Sigma Consulting and Training in St. Cloud, has helped Minnesota business owners at the formation stage. If they don’t understand profitability, expenses, operation costs and record-keeping as they start the business, it can lead to problems later on, he said.

“Unaccounted expenses and mismanagement is the biggest problem I see,” said Mohidin, who offers free consulting to owners through Elevate Hennepin, a program designed to help small-business owners living in Hennepin County. “The more organized they are, the more successful.”

It’s very likely that a new business will not be profitable for at least a few months, Mohidin said. Building up reserves of at least six months to cover expenses, including living expenses, is ideal, he and other entrepreneurs said.

“Have some money to prepare yourself for not having a paycheck,” he said.

The first thing business founders should do is open a bank account separate from their personal ones, Mohidin said. If not set up properly, it will be hard to determine which transactions were solely for the business during an auditing process.

Overdraft fees and bank charges can also affect business cash flow, he said.

Business owners should aim to allocate between 30% and 50% of their profits to personal compensation, Mohidin said.

“However, this allocation can be influenced by various factors, such as the size of the business, the industry it operates in and the financial needs of the individual owner,” he said.

It’s not a must to look at compensation as a percentage, said Alex West Steinman, co-founder and chief executive of the Coven, a company that operates multiple co-working offices in the Twin Cities.

“I would look at market rate for the role that you’re filling as a founder and then determine what the business — and you — can sustain,” she said, adding they should determine how much sweat equity they can put into the business before paying themselves.

Using accounting software systems like QuickBooks or computer programs like Microsoft Excel to create spreadsheets is a good place to start, Mohidin said. If unfamiliar with how to use either, free consulting is available through initiatives like Elevate Hennepin.

If it’s affordable, try hiring an accountant.

In addition to being disciplined with money, business owners also must practice self-control. That means avoiding extravagant vacations and cracking down on unnecessary splurges like shopping or enjoying the nightlife.

“Entrepreneurship is risk management,” said Shelisa Demuth, founder of Laurel, a communication services company, and the former executive director of Beta, a nonprofit that helps Twin Cities startups.

“I’ve seen countless founders who got creative when cash was light, and it can happen for unforeseen reasons when starting out. The ones who weathered it understood their own capacity, immediate needs, long-term impact and how far outside of industry or focus they were willing to go to get their company to the next month,” she said. “Betting on big wins is irresponsible. Business survival requires an exceptional amount of focus, dedication, communication and sometimes sacrifice.”

Investing free work and late nights is one aspect of being self-employed, said Maliza Kalema, executive director at Sown Emancipation. Another is being willing to participate in the workforce while building a company.

In the early days of running her plant-based toilet paper company Bim Bam Boo, Zoë Levin sought income by working for another business.

“I got a side job when things were rough,” she said. “There’s only one way to fix cash flow: Get more cash. I know a few founders that have got their business off the ground with similar tactics.”

Many times, people starting businesses feel outside pressure to fully commit to that venture, even if it means they can’t pay themselves.

“That’s not always the best choice,” West Steinman said.

Other entrepreneurs will ask West Steinman how they can grow their brand or company. Her response: “Don’t quit your day job until you’re ready.”

Self-employed people should always examine their family and personal needs to see if they have to take freelance or outside work to supplement income. “When is your trigger for going full time? How does the business need to perform in order for you to be full time?” she said.

Some family situations, West Steinman said, require a two-person income, so keeping a steady source of income until you’re ready to transition into a full-time commitment is acceptable.

Working multiple jobs could lead to burnout, though, so seeking other sources of bridge money is wise as well, experts said. To avoid adding debt, owners can search for government grants or use crowdfunding campaigns.

Maazah recently launched a campaign on Wefunder, an online crowdsourcing platform that allows members of the public to buy small equity shares of startups and small businesses. The money will help support the Target and Whole Foods launch, Sajady said.

When Terace Johnson wanted to start Spotlight Staffing, her job-placement company, in 2021, she asked her fiancé if she could leave the workforce and focus on the business. He had no problem being the sole provider.

“He believed in everything that I stood for and still does,,” Johnson said.

The company made its first $100,000, and Johnson’s partner continued to work, allowing them to increase their savings account. When her company hit a dry spell in the middle of 2023, Johnson decided to not pay herself. Fortunately, the couple was able to get by on their savings. Once things improved, Johnson tightened her company’s budget in case something like that were to ever happen again.

It’s a good idea, Johnson said, to establish boundaries with your partner to know when, and where, money will come from.

“Having a supportive partner is truly how I get by,” Johnson said.