Whether you are an aspiring owner of an independent or franchised business, the term net worth is something you will often hear in your entrepreneurial journey. We will reveal what business and personal/individual net worth mean and how to calculate it properly!
- Net worth is the value in money that some business or persona/individual has at its disposal after liabilities costs are subtracted from assets value.
- Businesses calculate this value in order to show financial health to potential investors, and individuals usually use this metric to show lenders that they have the financial ability to cover loan costs.
- The two main metrics for calculating net worth are the value of assets and the cost of liabilities(debts).
What Does Personal/Individual Net Worth Mean?
Personal/Individual net worth is a term that refers to the money that individuals have at their disposal after from the value of their assets (houses, cars, stocks, etc.) are subtracted their liabilities(short and long-term debt obligations) that must be paid.
Usually, individuals calculate their net worth to get loan approval from the bank to cover the cost of buying a house or starting an independent or franchised business.
How To Calculate Personal Net Worth
If you want to calculate your net worth, you will need to put on one side all assets that you own and on another side all your short and long-term debts. When you subtract the debt from the money value of your assets, the $X amount that you get is your net worth!
Many people think that if they have a mortgage, the value of their house can’t be added when calculating personal net worth. However, that is not true!
If you have a mortgage on a house that has a market value of $1,000,000, and you have paid 50% of your house loan, it means that you own $500,000 in net worth. The same calculation can be used on cars, land, or any other assets that are purchased from bank loans!
What is the Business Net Worth?
Business Net worth is a common financial term that refers to the money that certain businesses have at their disposal after counting all corporation’s assets minus the cost of all its liabilities.
By knowing their net worth, businesses can show the company’s financial health and overall profitability of their business systems to potential investors and buyers or can use it to show lenders how much their system’s ability is to return its debts.
This is a very useful metric due to the fact that it takes all into account; all business sources of wealth and all its short-term and long-term debts!
Two Main Metrics Used To Calculate Net Worth
An asset is a resource with economic value that a corporation or persona owns or controls. In practice, this means everything that can have a buyer and have its own financial value falls in the asset category.
Examples of personal/ individual assets:
- Cash in the Bank account (Liquid Assets)
Examples of company/business assets:
- Cash reserves
- Real Estates
- Working equipment/machines
- Office furniture
- Working vehicles
The assets of a company can be found in its financial records, and if individuals want to make a list of their assets, the best practice is to use simple balance sheets that are very easy to use!
If you own a business, the best practice is to create or buy assets to benefit the company’s financial health. An asset can increase sales, reduce expenses and generate cash flow!
Also, it is good to know that there are several types of assets, including current, fixed, financial, and intangible.
A liability is something a company or individual owes, usually a sum of money. The easiest definition of it is that these are short-term and long-term debts that, in the end, no matter if you are a business or individual, will need to be paid!
The liabilities, same as assets, are declared in company financial reports. Individuals must by themselves check what their liabilities are or can hire a financial advisor to help them with this important aspect of personal finance.
Examples of personal/ individual liabilities
- House mortgage
- Auto loans
- Student loans
- Unpaid Tax
- Unpaid medical bills
- Credit cards dep
Examples of company/business liabilities:
- Accounts payable
- Deferred revenues
How to Calculate Net Worth of a Company
- Net worth = All assets – All liabilities
A company that sells cooking equipment wholesale to restaurants has $40 Million in assets and $25 Million in liabilities in a particular annum.
The calculation goes as follows:
- = $40 Million – $25 Million
- = $15 Million
The company’s net worth after the end of the particular annum is $15 Million.
A company that produces packaging material for all kinds of businesses like food chains, plant vendors, and supermarkets has a total asset value of 300 Million dollars.
After adding up all the liabilities like wages payable, loans due, deferred credits, and warranty liability, the value comes to $200 Million.
The calculation goes as follows:
- = $300 Million – $200 Million
- = $100 Million
The net worth of the packaging material company is $100 Million.
A company that produces and distributes swimming gear has assets worth $20 Million at the end of one business year. At the end of the same year, the company has liabilities worth $4 Million.
Here’s how this calculation goes:
- = $20 Million – $4 Million
- = $16 Million
The swimming gear production and distribution company have a net worth of $16 Million.
Why It is Important to Know a Company’s Net Worth?
Knowing the net worth of the company of interest can be very useful to both the management boards and owners of the company as well as prospective investors of the company.
Potential investors can compare companies they are interested in by using this financial metric in order to determine their financial strength.
People in charge of the company can look at the net worth, among other statistics, and create marketing and other plans for the company’s future s.
What Does a Negative Net Worth Mean?
A negative net worth indicates that the company in question has more liabilities than it does assets. This means that the business has more expenses than it can afford.
A negative net worth indicates that the company has poor financial health!
It’s not abnormal for a brand new company to have a negative account balance because of loans taken out to start the business and other initial expenses.
Still, over time this financial metric should turn positive. If it doesn’t, the company should hire a financial advisor and get advice on cutting costs and increasing its assets through sales or other means!
How Can a Company Increase its Net Worth?
Proper financial planning and management
Using financial management software might give a company the necessary net worth boost. This can help keep track of a company’s finances in one place and make it easier for accountants to present data to managers as well.
Boosting customer service
The service a company provides its customers directly affects the sales made by the company. Maintaining a good relationship with the customer base and ensuring all their needs are taken care of is vital to a company’s success in the long run.
Happy customers help increase sales by recommending a company’s services to friends and becoming recurring customers.
Carefully handpicking talented workers is essential to the longevity of a business. Great workers work more efficiently, communicate their ideas better and earn better results for a company.
These workers should have the proper facilities to manage their workload and communicate with leaders and fellow workers. A good project management system is worth the investment.
Creating a good working environment increases the productivity of the company, which will be reflected in the financial aspect of the business as well.
Building a specialized brand
Too often, businesses try to spread over a huge area of specialties in an attempt to bring in maximum profit. But choosing a specific niche that the company can specialize in and providing high-quality services can brand that company as a leader in that industry.
Customers appreciate high-quality niche services compared to generalized services. Specialized care helps customers solve specific problems that may be overlooked by companies that provide general care.
It is easy to understand what net worth is. However, a more challenging task will be to make some assets that can boost this metric in favor of a business or individual.