As a business owner, where do I report my drawings to make sure that I get paid by my customers?
Many business owners think that their share of the business is drawings they can take out as and when they need them.
Unfortunately this does not take into account that this represents two things;
-
1. Wages for working in the business.
2. Dividends for being the business owner.
Many small business owners don’t count their time in the business as wages and therefore run the risk of the following issues.
-
a. Their costs are not considered when calculating their sales prices. This means their wage is not recovered in prices. Another way of saying this is; customers are not paying them as an employee of the business even though they work the same as everyone else.
b. Because they effectively have a zero wages cost it is impossible to get any one else to work for them at that cost and therefore they are never able to get a break from the business nor take a well earned holiday.
No matter how you choose to take money out of the business, make sure that you count your wages cost when calculating sales prices. If you do not do this you may actually be developing an unsustainable business model and putting a noose around your own neck.
If you are looking for a breakdown between wages and dividends then use the following rule of thumb.
-
1. Calculate what it would cost you to hire some one to do what you’re doing. This is the amount of your wage.
2. Any amount over this is dividends from the profits you have created.
No comments yet.