What do you know about your company’s spending habits? How about the money coming in and going out?
Net worth is an important number to assess a company’s health. This beneficial metric can indicate a company’s potential for future success and stability. If you are unsure about your net worth for any reason, check out this article to learn the ins and outs, including how to calculate it.
Net worth definition
What is net worth? It is defined as the value of everything a company owns minus all its debts. Net worth is the total account of all financial assets and is the difference between what a company owns and what a company owes. In the corporate world, net worth is called “book value” or “shareholders’ equity”, and it is a good determinant of what a business is worth.
Based on this definition of net worth, this metric is the most important statistic to determine a company’s current financial health by capturing all financial efforts, up until this point. The meaning of net worth is a valuable figure for investors and is often used by financial institutions to determine if a company is worth financing.
Net worth calculation
If you are ready to get a better picture of your company’s finances, the next step is learning how to calculate your net worth. The formula is:
Net Worth = Total Assets - Total Liabilities
By calculating your company’s net worth right now, you will be able to see everything the company has earned and spent up until this point. It is a simple, yet powerful snapshot of the funds coming in and going out of a company.
Example of net worth
If you are wondering how this calculation might operate, here is an example of net worth with a potential company.
Company Green has assets that include £100,000 in cash, £200,000 in equipment, £45,000 in accounts receivable, and £300,000 in property. These assets total £645,000.
Company Green’s liabilities include £175,000 in accounts payable, £125,000 in equipment loans, and property loans of £150,000. These liabilities total £450,000.
Based on the amount of assets and liabilities for Company Green, what is the net worth?
£645,000 (Assets) - £450,000 (Liabilities) = £195,000 Net Worth
This example of net worth shows Company Green has a positive net worth, which indicates good financial health and stability. If this company was interested in obtaining financing from a bank, you could assume the chances might be reasonably good.
Meaning of net worth
To understand the meaning of net worth, it is important to remember that although this figure is an important financial statistic of a company’s financial health, it is only a handy glimpse of a company’s finances right now.
Say a company wants to test out a new product, but need new financing to move forward. The company’s outlook for being approved for new or additional funding will be improved with knowing their net worth over time.
A company that has assets exceeding their liabilities indicates a positive net worth. This means good financial health and provides shareholders and investors with a positive impression of a company.
However, if a company’s liabilities exceed their assets, this can indicate negative net worth. This doesn’t necessarily mean a company is irresponsible with their finances. It just means that currently, the liabilities outweigh the assets. Completing another assessment in the future may result in a different net worth.
Although knowing the meaning of net worth is helpful, this figure is not synonymous with the current market value.
Tracking net worth over time can allow a company to get a comprehensive view of their finances and gain perspective on current or potential debt. This is due to the financial transactions that are recorded on the balance sheet. These are historical figures based on previous market value, not on current market value. Calculating a company’s net worth on a regular basis is the best way to stay on top of finances, determine if additional funding is necessary, and track financial progress over time.
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