Your Business Angels - Drawings

Drawings

31.05.2024

Why is it growing

Or directors’ drawings or as the insolvency industry calls in “debit loan accounts”

Understanding Drawings and Their Impact on Your Business

What Are Drawings?

Drawings occur when money leaves your business for non-business purposes. This money isn’t an expense, isn’t paying for an asset, and isn’t being deposited into a business bank account. Here’s how the drawings account increases and why it’s an issue:

How the Drawings Account Increases:

1. Personal Withdrawals:
   • Example: Using an ATM to withdraw cash or using business funds to pay for personal items or expenses.
   • Impact: Every time you do this, the drawings account grows. If unchecked, this can significantly deplete business funds.
2. Disallowed Expenses:
   • Example: Claiming a percentage of a power bill for a home office or personal use of a company car. The portion not allowed by tax laws ends up as drawings.
   • Solution: Include these amounts in your salary. This way, they are taxed properly, and your drawings account doesn’t increase unnecessarily. Talk to us about changing your salary to absorb all the disallowed expenses.
3. Setting Aside Money for Tax:
   • Example: Putting money aside for tax in a non-business account. Even with good intentions, it counts as drawings.
   • Solution: Deposit tax savings directly into the business’s running balance account with the ATO or a designated business tax savings account. This ensures the money is tracked and not mistaken for sales revenue when returned.

Talk to us about having a plan that pays for tax every week and takes the pressure off you.

4. Non-Business Assets:
   • Example: Purchasing an asset like a caravan in the company’s name because it’s easier to get financing, but it’s used personally.
   • Impact: Payments for such non-business assets are considered drawings.

Always talk to us before you buy an asset.

Don’t kid yourself – if you think you will keep a small salary while you receive allowances such as a higher family tax benefits from the government and make up with drawings, if the ATO select you to audit and realise what is happening they will really punish you.

Why Is a Drawings Account Problematic?

1. Cash Flow Issues:
   • Drawings reduce the amount of cash available for business operations, potentially leading to cash flow problems.
2. Tax Complications:
   • Mismanaging drawings can lead to tax issues, as personal expenses need to be clearly separated from business expenses.
3. Financial Mismanagement:
   • Frequent and unchecked drawings indicate poor financial discipline, impacting the overall financial health of your business.
4. Impact on Business Growth:
   • Excessive drawings can limit funds available for reinvestment in the business, hindering growth and development.

How to Manage Drawings Effectively

1. Monitor Withdrawals:
   • Regularly review your withdrawals to ensure they are for business purposes.

Talk to us, if your salary isn’t enough increase it (subject to what the business can afford). There are many reasons why you should a higher salary.

2. Proper Expense Reporting:
   • Ensure that disallowed expenses are added to your salary to avoid increasing your drawings account.
3. Designate Accounts for Savings:
   • Use business accounts for tax savings to keep personal and business finances separate.
4. Consult us – talk to us, real wealth is through proper planning.:

Keep your business financially healthy, ensuring you have the necessary funds for growth and stability.

Serviced by related company Fresh Number Pty Ltd