Recordkeeping to Monitor Growth

• The only way to record growth in a business is to keep a set of records that will produce both a statement of earnings and a balance sheet. The statement of earnings, sometimes referred to as a profit and loss statement, keeps track of operating income and ordinary expenses like rent and telephone and utilities expense. It will show if the business is making money or losing money. The balance sheet keeps track of capital assets like machinery and heavy equipment as well as liabilities such as loans payable. When a company grows it is usually in the form of increased earnings. The net earnings are added to the balance sheet capital account to determine true owner's net worth.
  
  

How Owners Draws Affect Growth

• In any business, the owner or shareholders have the right to withdraw profits. In a corporation, it is done in the form of payroll wages to its owner/officers. This directly reduces the net profit of the company because wages are an expense, and conversely, the net worth of the company is reduced because the profit was reduced. In a sole proprietorship, the owner withdraws profit in the form of capital withdrawals, but as the name implies, the owner is reducing the net worth by withdrawing capital.
  
  

Growth, Profit, and Draws

• A company may grow substantially either through increased sales or by eliminating unnecessary operating expenses. However, if the owner removes the excess growth in the form of higher payroll or higher owner draws, the affect on net worth will be negated. Net growth can only increase net capital where the owners leave some of the growth in the company instead of drawing it all out. For example, if a company shows a net profit of $300,000 up from $200,000 the previous year, and the owners draw out $225,000, the company will see an increase in net worth of $75,000.
  
  

Considerations

• If you're planning to sell a company within a few years, as an owner, you should consider drawing less money than the company is earning, so the net worth will increase. Otherwise, most owners will withdraw the net earnings to simply increase their personal income, which is one of the true benefits of owning a business.