Hey there, business owners! Running your own business can be tough, especially when it comes to keeping track of your finances. Today, we’re going to break down something that might sound complicated but is super important: Drawings and Shareholder Current Accounts. Let’s make this simple and easy to understand. Ready? Let’s dive in!
What Are Drawings?
Drawings are the money you take out of your business for personal use. Think of it as paying yourself from the business funds. Whether it’s for groceries, bills, or a nice dinner, this is your money coming out of the business.
What Is a Shareholder Current Account?
A Shareholder Current Account is a special record within your business that tracks all the money you put into the business and all the money you take out. It’s like a personal financial diary within your company.
Why Are These Important?
Keeping track of drawings and the Shareholder Current Account is crucial for a few reasons:
- Tax Purposes: Inland Revenue needs to know how much money you’re taking out of your business. Proper records ensure you’re paying the right amount of tax.
- Financial Health: Knowing how much you’re taking out helps you see if you’re drawing too much, which could hurt your business’s cash flow.
- Transparency: Clear records prevent confusion and disputes with other shareholders or partners.
If you take out more money than you’ve put in through funds or credit as a shareholder’s salary, you need to charge interest on the overdrawn balance at the IRD FBT interest rate. If your business faces financial trouble, you personally become a priority debtor of the company in the eyes of Receivers, Liquidators, and Inland Revenue. So, always be mindful of your drawings.
Managing Overdrawn Shareholder Current Accounts
Taking out more money from the business than you’ve put in can cause problems. Here’s why overdrawn accounts are an issue and how to manage them:
- Interest Charges: If your Shareholder Current Account is overdrawn, your business must charge you interest on the overdrawn amount based on the Fringe Benefit Tax (FBT) rate. This ensures you’re paying fair value for the money you’ve borrowed from the company.
- Priority Debtor Status: If your business goes under, you, as an overdrawn shareholder, must repay the overdrawn amount before other creditors are paid. This can hit your personal finances hard if the business fails.
Example Scenario
Imagine you own a small construction business. Throughout the year, you take $50,000 from the business for personal expenses (drawings). But you’ve only put $20,000 into the business as your shareholder’s salary and other contributions. At the end of the year, your Shareholder Current Account shows an overdrawn balance of $30,000 ($50,000 drawings – $20,000 contributions). Inland Revenue requires you to charge yourself interest on this $30,000 overdrawn balance. If the IRD FBT interest rate is 5%, here’s the calculation:
- Overdrawn Balance: $30,000
- Interest Rate: 5%
- Annual Interest: $30,000 x 5% = $1,500
You’ll need to repay $1,500 as interest for using the company funds for personal use. Additionally, if your business goes into liquidation, you’ll owe the business $30,000 before any other creditors get paid.
How to Manage Drawings and Shareholder Current Accounts
Managing these accounts doesn’t have to be a headache. Here are some practical steps:
- Record Everything: Every time you take money out of the business or put money into it, make a note of it. This could be in a spreadsheet or accounting software.
- Set Limits: Talk to your accountant to determine a reasonable amount you can draw each month without straining your business finances.
- Regular Reviews: Check your Shareholder’s Current Account regularly to ensure everything is up-to-date and there are no discrepancies.
How to Identify Discrepancies
Identifying discrepancies in your Shareholder Current Account is crucial for maintaining accurate financial records. Here are some signs of discrepancies:
- Missing Transactions: Certain withdrawals or deposits not recorded.
- Example: You took $1,000 out of the business account last month, but this transaction is not reflected in your Shareholder Current Account.
- Incorrect Amounts Recorded: Amounts recorded may not match the actual amounts withdrawn or deposited.
- Example: You withdrew $500, but your account shows a withdrawal of $5,000.
- Unexplained Differences: Differences between your records and the bank statements that you can’t explain.
- Example: Your records show a balance of $10,000, but the bank statement shows $8,000 without any clear reason.
- Duplicated Entries: Duplicate entries can inflate your account balance.
- Example: A $2,000 deposit is recorded twice, making it appear as though you have an extra $2,000.
Regularly reviewing your financial records and reconciling them with bank statements can help catch these discrepancies early.
Common Mistakes to Avoid
Let’s look at a few common pitfalls:
- Mixing Personal and Business Funds: Keep your personal finances separate from your business to avoid confusion and potential tax issues. Don’t use the business bank account as your personal bank account.
- Ignoring the Account: Regularly review your Shareholder’s Current Account. Ignoring it can lead to messy finances and unnecessary accounting fees at year-end.
- Not Seeking Help: If you’re unsure, consulting with an accountant is always a good idea. They can help you keep everything in order.
Final Thoughts
Managing your drawings and Shareholder’s Current Account might seem like a small part of running a business, but it’s vital for your financial health. By keeping clear records, setting limits, and reviewing regularly, you can avoid headaches down the line.
If you have any questions or need further advice, don’t hesitate to reach out. Happy business managing!
By understanding and properly managing your drawings and Shareholder Accounts, you’ll have a clearer picture of your business’s financial health and ensure you’re on the right track to success.
For more insights, check out our article on improving your cash flow and learn how to keep your business financially healthy. Also, explore securing your financial freedom by crafting a business ready for sale on The Cash Out Catalyst.
