Net Worth

What does the term net worth mean? And why is it something a business owner should pay attention too? The actual definition of net worth is: total assets minus any total liabilities.

Let’s take a closer look at this. Net worth is a combination of money invested by the business owner and an accumulation of profits over the life of the business. In general, net worth can be described as the overall difference between what a company owns versus what it owes.

Sometimes a company may need an influx of money in order to buy new equipment, purchase a new building or develop a new product. Or perhaps they need money for advertising. Whatever the reason, the owner can either put more of his own personal money into the business, which increases his equity in the business, borrow funds from a bank, or seek an outside investor. If a company has reached its borrowing capacity they may need to add a partner/shareholder rather than seeking money from a bank.

The net worth of a business should increase each year. This assumes that the business is generating positive net income (i.e., sales are greater than your expenses). Even if your net income is increasing each year, your net worth could be decreasing. There are a few reasons for possible decreases, such as the owner taking distributions out of the business or an increase in debt (which can decrease net worth as a percentage, not dollar amount). But the important thing for any business owner to keep in mind is, a positive net worth does not a guarantee success, but a negative net worth could be reasons to assess your business and make immediate changes.

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