Your Ultimate Guide to Profit vs Drawings
- hellocashflow
- 5 days ago
- 3 min read
When you own a business, it's easy to confuse the money the business earns with the money you take for yourself. For many small business owners, this is a source of confusion. You might have a pile of cash in your bank account from sales, but is it all yours to spend? Or do you need to hold some back? Knowing the difference between what your business earned and what you can personally take out is crucial for its long-term health.
Let's make it simple by thinking of the business as a separate person with its own wallet.
What Is Profit?
Think of the business as a separate person. At the end of the month, the business calculates its Profit by taking all the money it made (revenue) and subtracting everything it spent to operate (expenses). This final number is the money that the business has earned. This goes into the business's wallet.
The Profit of your business is displayed on your Profit and Loss Statement.
What Are Owners' Earnings?
Owner Earnings is the money you could safely take out of the business' wallet after setting aside cash for crucial future expenses, like replacing a major piece of equipment or setting aside cash for taxes. It's the profit that remains after you’ve covered these essential business needs.
Unlike profit, it's not a standard accounting term. It may be called "Shareholders' Remuneration" if your business is a company and comes out of the business wallet if you pay yourself a regular salary. In this case, it is displayed as a type of expense on your Profit and Loss Statement.
If you are a sole trader, it will not be displayed at all because YOU are the business. The cash from the profit is still in the business wallet until you take Drawings.
What Are Drawings?
Drawings are when the owner reaches into the business's wallet (the company bank account) and takes some cash for themselves. This action doesn't change how much was earned (profit); it only changes how much cash is still in the wallet.
Your Drawings are displayed on your Balance Sheet.
Why Is It Crucial to Keep These Separate?
Combining Profit and would be like saying your "paycheck" for the month is less because you took cash out of your wallet for groceries. You still earned the full amount on your paycheck, but now you have less cash in your wallet.
Similarly, a business can have a great, highly profitable month, but if the owner takes out a lot of money in drawings, the business might end up with a low cash balance. Conversely, a business might not be very profitable, but if the owner doesn't take out any drawings, the cash balance might look strong.
These distinctions are essential for accurately assessing the true financial health of the business.
At Hello Cashflow, our reports keep Profit (on the Profit tab) and Drawings (on the Cashflow tab) separate to allow you to accurately see two different things:
How well the business is performing (profit)
How much money the owner is personally taking out (drawings)
We also display Owners' Earnings on our reports in a variety of reports such as:
Now you know the difference between profit and drawings, it's time to put this knowledge to work.
Take a closer look at your business's budget and cash flow forecast for the coming 12 months
As you review your numbers, ask yourself: 'What is the owner's earnings target I need to set for my business to thrive and support my own financial goals?'.
By keeping these concepts separate, you can make smarter decisions and build a truly stable future for your business.
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