You have probably heard talk about the ‘net worth’ of certain famous individuals. Perhaps you’ve even heard a few references to the net worth of a well-known company. While it’s a fairly common phrase, not everyone knows what it means.
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Maybe you’re keen on knowing what your net worth is, just so you can compare it with your favourite billionaire business magnate (good luck with that!). You can learn how to do this from our article, How to Calculate Your Net Worth.
What about your company? How much is it worth? And what do we really mean when we talk about the net worth of a business?
We will let you know how to calculate your business’s net worth. But first, let’s explain what the concept of a company’s net worth means.
What Is A Company’s Net Worth?
A company’s net worth is simply the value of its assets after its liabilities (that is, debt) have been subtracted (i.e. after it’s paid them off).
In other words,
Net worth꓿ Total Assets-Total Liabilities
Note that the net worth of a business isn’t the same as its market value, which is usually the value of its market capitalisation (for companies listed on a stock exchange).
So companies like Dangote Cement and MTN Nigeria will have both a market value that’s determined by people trading shares in these companies and a net worth that’s determined by the difference between their assets and their debt.
Your Business’s Net Worth
Now that we’ve explained what a company’s net worth is, let’s show you how you can calculate it for your business, in three steps.
Step One: Calculate Your Business’s Total Assets
Your business’s assets are the things that belong to it. They can either be tangible (physical items) or intangible (nonphysical items).
Tangible assets may include buildings, vehicles, office furniture, computers, manufacturing facilities, cash, and inventory. Intangible assets may range from patents and trademarks to software and databases.
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Make a list of all your assets and their current market value. Sum up the values, and you’ll have your business’s Total Assets.
Step Two: Calculate Your Business’s Total Liabilities
Business liabilities are your business’s financial obligations to other parties that it hasn’t fulfilled yet. They are debts owed to other companies, vendors, employees, and the government. Examples include bank debt, taxes owed, wages owed, and money owed to suppliers.
Liabilities may either be short-term or long-term. Short-term liabilities, such as invoices, are paid off within a year. Long-term liabilities, such as bank loans, may be paid over a longer period.
List your liabilities, along with their current value. Sum up the values, and you’ll have your business’s Total Liabilities.
Step Three: Subtract Liabilities From Assets To Get Net Worth
Remember the formula we provided earlier. It says that to find out your business’s net worth, you should subtract its Total Liabilities from its Total Assets.
Now that you have the Total Assets and Total Liabilities, you can go on to calculate your business’s net worth.
Total Assets-Total Liabilities꓿ Net Worth
For example, if your business’s Total Assets are worth ₦15,700,000 and Total Liabilities are worth ₦6,600,000, its Net Worth will be:
Why You Should Care About Your Business’s Net Worth
It’s important to know your business’s net worth for a number of reasons.
- It gives a quick snapshot of where your business currently is. If assets exceed liabilities, your business is in a good state. But if liabilities exceed assets, it’s a sign that all is not well and some things about the business have to change.
- If you know what your business’s net worth has been over time, you can tell whether it’s making progress or not. A continual increase in net worth may indicate that the business is on a path of sustainable growth
- Your net worth gives you a good view of your company’s debt situation. Even if you have a lot of liabilities, you’re still in a good place if assets are significantly greater.
Knowing your company’s net worth isn’t really about whether you can compare it with the big hitters in your industry (if it isn’t one of them). It’s about learning how much progress the business is making. If its net worth is well into positive territory, you have something to cheer about.
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