What Is Net Worth and How Do You Calculate Net Worth?
If you’ve been working hard to grow your personal wealth or the value of your business, you may be curious to know your net worth or the net worth of your company. Learning about the value of your wealth or how much your business is worth is not only intriguing, you can also use this information to understand your current financial situation or to get a brief overview of your company’s current position.
It’s important to understand what goes into calculating your net worth and to review the differences between personal finance and business net worth to ensure you’re landing on the right numbers.
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What Is Net Worth?
Simply put, net worth is a measurement of wealth for an individual, entity, corporation, or country. Wealth can feel like an abstract concept to attempt to calculate but it’s basically what you’re left with if you were to sell all your belongings, equity, and assets, then use that money to pay off all the debts you owe. To figure out your net worth accurately, you have to know details about your assets, liabilities, debt, and equity.
Why Is Net Worth Important?
The importance of a net worth calculation depends on who’s calculating it. As an individual, you may want to know your net worth to gauge how much debt and how many assets you have. If you have a negative net worth, you know your debt outweighs what your assets are currently worth. When your debt to asset ratio is negative, it can be a wake-up call that you need to address your debt more aggressively to get back into positive net worth.
A corporation or large company may need to calculate net worth if it plans to go public and begin selling stock on the market. With a carefully calculated net worth, it’s easier to value the company and stockholders can better decide if they want to invest.
Smaller companies or businesses should also always have an idea of their net worth because it’s an important figure for lenders. When a business applies for a loan, the lender analyzes the company’s net worth to review its debt to income ratio. If debt outweighs assets, lenders are less likely to offer a loan since they may decide it’s too financially risky.
How to Calculate Net Worth
Figuring out your net worth or the net worth of your company is an easy calculation. You simply need to calculate the difference between your assets and your liabilities. Identifying your assets and liabilities correctly is the most important part of the equation.
How to Find Total Assets
It can be difficult to identify which assets are yours and what to include in the calculation of your net worth. There are many different types of assets and depending on your investments or business, your assets may vary. Some of the most common assets you or your company may have include the following:
- Checking and savings account balances: Your cash and cash equivalents are liquid assets because they can be used to pay off liabilities immediately.
- Your business’s office building: Since this building can’t be liquidated quickly but still holds value, it’s a fixed asset that can be included in the equation.
- Current inventory: The inventory your business is holding that will be sold and converted into cash within the year is part of its current assets and can be included in the net worth calculation.
- Investments: Bonds, the cash value of your life insurance policy, mutual funds, retirement plans, and other investment values are also considered assets.
The types of assets included in your net worth encompass a variety of belongings and resources, so it’s important to review anything of value as it relates to you or your company.
How to Find Total Liabilities
Your liabilities can be defined as your negative equity and reference any debt you owe to another individual, company, or entity. Depending on your business or personal situation, the debts you owe may include:
- Accounts payable: Your business may owe other companies for their goods or services, known as accounts payable.
- Salaries owed: If your company has employees and you pay them salaries, these figures count as your business’s liabilities.
- Auto loans: If you didn’t pay cash for your car, what you owe on your auto loan must be included as a personal liability.
- Credit card balances: If you don’t pay your credit cards off each month, the balance you carry is a liability, since it’s debt you owe.
When calculating your total liabilities, it’s important to include any debt you’re currently in, such as office equipment you’re paying off or what’s left on your mortgage.
Personal Finance Net Worth
If you’re attempting to calculate your personal finance net worth, you’ll use different assets and liabilities than you would for your business. However, the calculation is the same: your liabilities subtracted from your assets.
The assets you’ll use in this calculation relate to your personal finance and may include your banking account balances, the market value of your car, and the real property value of your home. Your liabilities are any debts you owe personally, such what you have left to pay on your mortgage or your current credit card balances.
When you calculate your personal net worth, you get an idea of how much debt you have in comparison to the value of your assets. You can use this calculation to create a budget or to see if your assets and debt increase or decrease over time.
Business Net Worth
You may need to calculate your business’s net worth if you apply for a business loan or if this information is requested by your shareholders. When you evaluate your company’s net worth, subtract your liabilities from your company assets. The assets and liabilities you use will differ from what you take into consideration when determining your personal finance net worth.
Your business’s liabilities may include income taxes or wages you need to pay. Assets for your business may include office equipment you own or your current inventory. The difference between liabilities and assets makes up your company’s net worth.
Whether you’re figuring out your personal or business net worth, this calculation can give you a snapshot of your financial health. By learning what you or your business is worth, you can figure out if you’re heading in a positive financial direction or if you need to make changes to your budget.
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