An owner’s draw is when a sole proprietor withdraws cash or assets from their business. Unlike a Personnel entry, an owner’s draw is not included in your company’s operating expenses and doesn’t function as a regular salary.
Remember that the owner's draw isn't the only option to represent paying yourself. You can create a Personnel entry for yourself instead to have your salary calculated as part of your overhead expenses and into your net profit. The method you take will depend on several factors, such as your business structure and tax regulations.
Differences between an Owner's Draw and a Personnel entry
Owner's Draw:
- Not included in operating expenses: Owner’s draws are not considered part of your company’s overhead or payroll costs.
- Recorded as a distribution of equity: Draws reduce the owner’s equity in the business rather than impacting net profit.
- Flexibility in amounts and timing: You can take varying amounts at different times, which is useful if your income fluctuates.
Salary (via Personnel entry):
- Included in operating expenses: Salaries are part of your company’s overhead, impacting both net profit and cash flow.
- Consistent paychecks: Salaries provide a steady, predictable income stream.
- Subject to payroll taxes: Salaries are processed as payroll, which means taxes and benefits are deducted.
An owner's draw can be a useful cash flow management strategy. For instance, a business with seasonal swings in revenue or a startup with an irregular cash flow might opt for an owner's draw when cash flow is strong.
For example, Jane owns a landscaping business. She earns most of her income in spring and summer. Instead of paying herself a fixed monthly salary, Jane opts to take owner’s draws during her busy seasons when cash flow is strong. In LivePlan, she creates a Dividend entry for April through September, withdrawing $5,000 each month.
Representing an owner's draw in LivePlan:
To represent an owner's draw, use a Dividend entry in your forecast, which will allow you to place specific draw amounts in specific months. This entry will appear in the Cash Flow statement as Dividends & Distributions:
Your owner's draw amounts will also be deducted from the Retained Earnings line in your Balance sheet.