- Writing a Business Plan
- Financial Statements
- Business Forecasting
- Business Checklist
BUDGET 10 - DRAWINGS AND DIVIDENDS BUDGET
Owners of an unincorporated business (IE sole proprietorships and partnerships), periodically "DRAW" (withdrawal) cash from their company to pay for personal living expenses. These monies are referred to as drawings. Many owners of sole proprietorships or partnerships consider drawings to be a salary. From a legal stand point, however, a cash drawing is not and should not be considered a salary of the owner (s). The reason is simple; owners of unincorporated businesses CANNOT enter into a legal binding contract with him or herself and therefore, CANNOT hire & pay him or herself a salary. In order words, if an owner(s) of a soleproprietorship or a partnership plans to receive money from their company, they will receive it through cash drawings; not a salary.
Accounting for a drawing and a salary have accounting implication. Furthermore, a salary is considered a business expense and therefore, reduces a company's taxable income (thus reducing their income tax obligation). A drawing, on the other hand, is NOT an expense and therefore, it does NOT reduce a company's taxable income. Moreover, as discussed under the equity section of the Balance Sheet, a drawing reduces an owner's capital (or ownership) in his/her company.
If the legal form of your business is a sole-proprietorship or a partnership, then your task, in this Financial Budget, is to forecast the amount you plan to draw from your company (if any) in each forecasted business year. In addition, you will be required to forecast the month or months in which the drawings are expected to be paid to you.
Since Murray is a sole-proprietor (IE an unincorporated business), any money paid to him by his company will be considered a drawing. Lets assume, Murray plans to draw from his company $500 in each month during 200X (July to December) and $1,000 in each month during 200Y. As a result, Murray's 200X Forecasted Cash Flow Statement would show a Cash Outflow for "Drawings" of $500 each month, beginning in July and ending in December 200X. Therefore, his total Drawings for 200X is expected to be $3,000 (IE $500 per month x 6 months). Murray's 200Y Forecasted Cash Flow Statement would show a Cash Outflow for "Drawings" of $1,000 each month, beginning in January and ending in December 200Y. Therefore, his total Drawings for the 200Y is expected to be $12,000 (IE $1,000 per month x 12 months).
Please Note: Murray's 200X and 200Y Forecasted Income Statements would not be affected, since Drawings are NOT considered to be an Expense.
CORPORATIONS AND DIVIDENDS:
Owners of Incorporated Companies, better known as Shareholders, do NOT take Drawings from their corporation (this would be considered fraud), rather they receive Dividends. A Dividend is simply a distribution of cash (or other assets) made by a corporation to its shareholders. A dividend is formally voted by the corporation's Board of Directors.
Usually the amount of dividend paid by the corporation (or received by each shareholder) depends on the number of shares owned by each shareholder. For instance, assume an aspiring Corporation with 10,000 shares outstanding, expects to declare a $1.00 per share dividend in August 200Y and a $2.00 per share dividend in September 200Z. Therefore, the corporation's 200Y Forecasted Cash Flow Statement would show a Cash Outflow of $10,000 for Dividends in the month of August. The corporation's 200Z Forecasted Cash Flow Statement, on the other hand, would show a Cash Outflow of $20,000 for Dividends in the month of September. Like drawings, Dividends are NOT considered an expense; and as a result, the corporation's 200Y and 200Z Forecasted Income Statement would NOT be affected by the approved Dividends.
Unlike a sole-proprietorship and a partnership, a active owner of a corporation (IE an owner that works for the corporation) can receive a salary. This type of owner, in essence, can receive a dividend along with a salary; if the Board of Directors decide so. The salary would be considered an expense of the corporation, while the dividend would NOT be considered an expense of the corporation.
If the legal form of your business is a corporation, then your task, in this Financial Budget, is to forecast the amount you plan to distribute in dividends (if any) and determine when these dividends will be paid. (which months). Owners of an Incorporated Business are advised to consult a professional before making dividend decisions!!!