The Two Financial Hats

Jul 08, 2021
 

As a founder, you have 2 roles.

One is the owner and the other is the CEO.

Simply put, one owns the business machine and the other operates it.

As the owner, you wear an investor hat. The investor considers the financial capital injected just like the shares bought on the stock market or real-estate investments. You want to ensure the capital and time invested in your wealth-creating machine will provide you with a financial return in the future.

As the CEO, you wear an employee hat. Your role is to operate the business and ensure it’s well managed financially.

It’s important to note that these two roles will conflict.

As the owner, your motivation is to maximize the financial return from your business. To generate a return on the investment of capital and time you have contributed while building it.

The dilemma you will face is the trade-off between taking income now as a CEO versus long-term wealth creation for your role as an investor. As a CEO, you want to be paid for your time, so you want to maximise the salary you draw from your company.

Yet, the more income you draw from the business now, the less capital there is to invest in the business to create long-term value.

But, drawing the minimal amount of fincome leaves more capital to create higher long-term value (if reinvested wisely), but at the cost to your current standard of living
outside of the business.

I see a lot of early-stage business owners paying themselves taking salaries and director drawings that are simply unsustainable for their phase of the business.

They are limiting the growth potential of their business because they are sucking all of the capital out of it that it needs to grow.

In your businesses startup phase, it’s unlikely you’ll have the resources to support an industry comparable income while investing cash flow into what the business needs to be self-sustaining.

If getting paid top dollar right out of the gate is your priority, then perhaps you’re better suited to freelancing or contracting or, dare I say it, employment.

Get a free module from the Financial Management for Founders course.

Get a taste for what you're in for with the 'No-BS' Guide to Financial Statements module.