#professionalizeyourbusiness series: False profits due to hidden expenses-Part 3 “Why don’t you pay yourself a salary?” I asked. “This business cannot afford to pay me a salary!” was the response I received from this client. Interestingly I have this response from many MSMEs. From analyzing his accounts, he could actually afford a salary because his average drawings were Ugx1.5M a month. This client had engaged me to set up the accounting structure for him to help him track his finances because he needed to know where all the money he was making was disappearing to. After installing QuickBooks and setting up the account codes, I guided the Book keeper on how to do the data entry. When it came to the Cashbook and Petty cash book, all the monies that went out of the business had to be posted into the respective financial accounts. This process revealed that the business owner was frequently but haphazardly getting money from his business for his family running and personal upkeep. As individual transactions (e.g. Ugx20k or Ugx50k) they looked little but when aggregated the sums were sizable comparative to the size of the business. Now in Accounting, all the monies that a business owner gets out of the business for personal use which is not a salary are ideally categorized as drawings. Drawings go to reduce the owner’s capital or equity in the business balance sheet (statement of financial position). Whereas salary would be a business expense and would be reflected in the profit and loss or income statement (statement of comprehensive income). The latter will reduce the business profits, which is not a tax advantage, but is very useful information on the true cost of running the operations. The 3rd hidden expense in this series is business owner’s or director’s drawings. The question a business owner should ask: If you were not playing the role you are playing in your business at the moment, how much would you remunerate someone to do it for? If this cost of doing business is not reflected in your accounts, it means that the profits or loss declared for that period are not true. Are you paying yourself a salary or drawing down your capital? To your success! professionalizeyourbusiness@gmail
Posted on: Mon, 06 Oct 2014 07:50:49 +0000
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