THE NUMBER · THE LOAN · CAPACITY
A US$2m machine is expected to save US$400k of cash a year. The borrower asks for a three-year loan to buy it.
// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON
Owner Drawings: a Worked Example
The profit is the family's. The repayments come from what is left.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
When a lender reads the accounts of a sole trader, a partnership or a family farm, the profit line answers the wrong question. It shows what the owners have earned, not what the business has left: their living costs, their income tax and anything else they take out still have to come from it before a dollar of principal is repaid. Drawings are that outflow. A lender takes them off profit to find the cash genuinely available for debt service, and reads them across several years to see whether the owners are taking out more than the business makes.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// WORK THE SUM
Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.
// 01 — WHY PROFIT IS NOT THE CASH LEFT FOR THE BANK
In a company, the people who run the business are usually paid wages, which are deducted before profit. A sole trader cannot employ themselves. In New Zealand, Australia and the UK alike, the money a sole trader takes out is drawings, not wages, and the owner is taxed on the business's profit whether it is drawn or left in. Partners are taxed the same way on their shares of profit, and what they take out is recorded against their capital or current accounts. New Zealand allows one exception: a partnership may employ a working partner under a contract of service, and that salary is deducted before profit and taxed through PAYE.
The result is that the profit of a sole trader, or of most partnerships, is struck before any reward for the owners' work and before their income tax. Set beside a company of the same size, whose profit is after salaries and company tax, it overstates what the business can spare. A lender who serviced debt from that profit line would be counting the family's grocery bill as cash for the bank.
// 02 — HOW A LENDER BUILDS THE FIGURE
Profit after interest, before drawings
+ Depreciation and other non-cash charges
− Drawings for living costs and private spending
− Owners' income tax paid in the year
= Cash available for principal repayment
Compared with: scheduled principal, and capital spending that cannot wait
The parts come from different places. Drawings are read from the movement on the owners' capital or current accounts: opening balance, plus share of profit, less drawings, gives the closing balance. Income tax may be paid from the business account, through provisional tax in New Zealand, PAYG instalments in Australia or payments on account in the UK, and is then usually booked as drawings too; a lender checks it is not deducted twice. Where the books lump everything together, the lender asks for a household budget, or estimates living costs, because a family that records no drawings has not stopped eating. Off-farm or other income is added where the family has it, which is the reasoning behind global cash flow.
// 03 — THE EXAMPLE
An orchard run by two partners, constructed for this page like every figure in it, reports profit after interest of US$420,000 for the latest year, after depreciation of US$90,000. The partners drew US$180,000 for living costs and paid US$110,000 of income tax. The orchard's loans require US$150,000 of principal a year. Figures are in US$ thousands.
Profit after interest 420
Add depreciation 90
Cash from trading 510
Less drawings for living costs −180
Less partners' income tax −110
Cash available for principal 220
Before drawings: 510 ÷ 150 = 3.40×
After drawings: 220 ÷ 150 = 1.47×
The profit line suggests the orchard covers its principal more than three times. After the family is paid and the tax settled, it covers it about one and a half times. The lender then looks back three years, because one good season can hide a pattern:
Profit after interest 300 + 210 + 420 = 930
Drawings and tax 310 + 300 + 290 = 900
Added to partners' capital 30
In two of the three years the partners took out more than the orchard earned, and over the period they retained 30 of 930. The equity behind the loan has barely grown while the accounts showed a profit every year. The cover levels are the example's, not a lending standard.
// 04 — THE COMPANY VERSION AND THE HOUSEHOLD VIEW
Drawings are easily confused with a salary, and the difference matters when a lender compares businesses. A family business run through a company pays its working owners wages, which reduce profit, and may pay dividends after tax. One run as a partnership usually pays them nothing until profit is struck; the exception is a New Zealand partnership that employs a working partner on a salary, which the lender then reads together with the drawings. To compare the two, a lender either deducts drawings from the partnership's profit or adds back the owners' wages to the company's, and states which it did. For a company, the lender reads the owners' total take as wages, dividends and any loans to shareholders together.
The second neighbour is the household. Many farming and family businesses sit across several entities, with a trust owning land, a company or partnership trading, and family members paid from more than one. A lender reading drawings from one set of accounts can miss the rest, which is why family files are often assessed as one group.
DEFINED IN ONE PARAGRAPH → · GLOBAL CASH FLOW → · FARM WORKING EXPENSES →
// 05 — WHERE IT DECIDES A FILE
Drawings decide how much debt a family business can carry. In agricultural lending, a lender's budget for a farm usually carries a drawings line beside farm working expenses, and a year when drawings exceed the surplus is often the first sign of strain. In a succession, where a second household joins the business before the first leaves it, drawings can rise sharply with nothing else changing.
The response sits in the conversation and the document. A lender may ask for a drawings budget with the annual plan, report drawings against it, or size the loan so that repayments fit after a realistic level of living costs rather than after the level the family hopes to keep to. A family that can show it cut its drawings in a poor season gives the lender good evidence that the repayments come first.
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- GOV.UK (HM Revenue & Customs), Expenses if you're self-employed — Overview — For sole traders and partners in a business partnership, allowable expenses that reduce taxable profit do not include money taken from the business for personal use — section 01 and the FAQ.
- Inland Revenue (New Zealand), Income tax for partnerships — A partnership does not pay income tax on its profits; the profit or loss is shared between the partners, who pay income tax on it in their own returns — section 01.
- Income Tax Act 2007 (New Zealand), section DC 4 Payments to working partners — Allows a deduction for a payment under a contract of service to a partner who personally and actively works in the partnership's business, the New Zealand exception in sections 01 and 04 and the FAQ.
// QUESTIONS PEOPLE ASK
- Are owner drawings an expense?
- No. Drawings are money the owners withdraw from the business for their own use, so they reduce the owners' capital rather than the profit. They are not deductible for tax in New Zealand, Australia or the UK: a sole trader or partner is taxed on their share of the business's profit, whether they draw it or leave it in. That is why the profit of a sole trader, or of most partnerships, is struck before any payment to its owners. A New Zealand partnership can instead put a working partner on a salary, which is a deductible expense taxed through PAYE, not a drawing.
- Can owner drawings be more than profit?
- Yes, and in a poor year they often are, because a family's living costs and tax do not fall as fast as its income. The excess comes out of the owners' capital, funded by cash in the bank, a larger overdraft or slower supplier payments. One such year is unremarkable. A pattern of them means the owners' equity is shrinking even though the accounts show a profit, which a lender reads as a weakening of the business behind its loan.
- How do banks treat owner drawings when assessing a loan?
- A bank deducts them, with the owners' income tax, from the business's cash profit, because the repayments can only come from what remains. It reads the actual drawings from the capital account, compares them with what the family says it needs, and may use its own estimate of living costs if the records are thin. It also looks across several years, because a family that has taken out more than the business earned in most of them is a warning even when the latest year looks strong.
- Do I pay tax on drawings?
- Not on the drawings themselves. A sole trader or partner pays income tax on their share of the business's taxable profit, and the timing of withdrawals does not change it. Drawing less does not reduce the tax, and drawing more does not increase it. Because tax is due on profit that may not have been drawn, the owners need to keep enough in the business or set aside to pay it when it falls due.
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