The Dangers of Drawing on Your Business Profits

Many business owners are not necessarily being paid a salary, in other words they’re not being paid a salary through the payroll but instead they are drawing profits as and when funds are available.

But how does this affect your business and does it have an impact on your business? I strongly recommend that instead of your drawings, this amount that you draw in the profits, instead of it being entered into your equity account or a drawings account I would recommend that you ask your bookkeeper to open up a drawings account in your ‘other expenses’. Your Profit and Loss Statement has all your income, all your expenses and has a profit from operations figure. Then right underneath that, this is where I recommend drawings should be.  Right after that there will your REAL Net Profit after drawings. Setting up your accounts this way allows you to see the actual profit that you’ve made in your business. It’s allows you to see how much money you’ve drawn out of the business and what is actually left. In many cases business owners are drawing money out of the business thinking that they have this amount of profit but instead are actually draining their cash flow significantly and often over-drawing.

I’m not saying that business owners are not going to do this; however I am saying that it’s really good for you to be able to see how much money you’re actually drawing out of the business and where it’s affecting and impacting your cash flow. By tracking the amount of money you are drawing from the business in your Profit and Loss, you can make informed decisions if your profit is NOT covering what you are drawing out.  Now you can make decisions in terms of taking steps to increase your income or decrease your costs, so you’ve got the right amount in Profit and are able to draw money and keep a cash flow positive business.

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