Knowing your net worth is a valuable figure to keep your finger on. Essentially, it’s how much cash and assets you have versus how much debt you owe. That’s how it works when you’re an individual, but when you own a business, the calculation gets a bit more complicated.
As a business owner, you have more ways of generating cash and additional assets than a sole individual. Of course, owning a business doesn’t guarantee a bigger bank account. The path to generating wealth from a business is complicated and results through a strong knowledge of your business, the market, and smart financial habits.
Let’s explore a few factors that impact your finances as a business owner and how to leverage them to build net worth.
How to calculate net worth as a business owner
Before we talk about building net worth as a business owner, let’s define how it’s calculated.
First, you need to determine all of your assets. Assets are considered the amount of cash and savings you hold as well as:
401(k)s and other retirement holdings
The value of your stake in the business
Real estate and land
Other valuable items
A simple way to estimate the value of your ownership of the business is to multiply the revenue. For example, in some instances, businesses are valued at about three times their revenue. This is not an exact calculation, and there are other valuation methods available through third-party firms.
Next, lay out your liabilities. Liabilities are the amount of debt you owe. For example, common liabilities include:
Credit card loans
Anything else you’re paying monthly payments on
Determining all of your assets and liabilities is a complex task, but you’ll have a general idea of your net worth. Now it’s time to figure out how to build it!
Understand how debt and business work together
Debt in your personal finances should be considered a detriment, especially when it’s frivolous like credit card debt. But debt can be used to invest in and grow your business when used strategically.
Having enough capital to grow your business is the best option, but you can leverage debt to accomplish goals. The takeaway is that debt is part of the strategic equation to create wealth, as long as it’s used wisely and managed with discipline.
So what does wise debt management mean? A step to strategically manage your business’s debt might involve refinancing into a fixed loan. Fixed loans generally have lower interest rates which can result in lower monthly payments and a fixed payback timeline. As long as you’re disciplined and make your regular monthly payments, dealing with the debt becomes less suffocating. However, if you’re considering refinancing, consider the following rule: Only refinance if you can save on interest or shorten your payback time.
Debt is also an important measuring stick to see how successful your business is doing. If your business debt gradually increases you’ll need to examine why. If you’re serious about growing your business and your net worth, keep a careful eye on debt.
Be mindful about growth
A constantly growing business may seem like a dream come true to the layman, but growth comes with expenses. No matter if your business sells a product, a service, or a combination of the two, your business needs to be ready to handle additional customers. Whether your growth means adding more space, a second location, or more team members, it’s crucial to determine the cost of additional overhead, salaries and benefits, and time to train new employees.
Growth for growth’s sake shouldn’t be the goal of your business. Growth should be based on your goals and vision for the business down the road. Of course, this will look different for everyone. One business owner might plan on selling the business after ten years; another may want to pass it down to family members for generations. Growth and goals should work in tandem to help you determine the best decisions for your business.
Be willing to take risks
Good big or go home ba-bay! How many times have we heard this cliche? But when it comes to growing your business and your net worth, taking calculated risks can be valuable. It’s a big component in building personal and professional wealth. In order to mitigate potentially dangerous risks for your business, you need to know your industry in-depth, have extra cash for emergencies and the ability to try new tactics, and know your target market.
Deciding to expand your sales team or retail space is a risk due to the amount of time and resources you invest. If the decision does well, you’ll gain more customers and hit your ROI. But if it doesn’t you’ll likely take the hit and have to regroup. But the chance of a risk paying off weighs on how much research you did in order to expect a realistic risk-to-reward ratio.
Stay focused on the big picture
It’s easy to get distracted. Sometimes the biggest hindrance to our personal and professional goals are bad influences surrounding us. Whether that’s spending way too much on unnecessary lifestyle choices or listening to your management team complain at weekly meetings, stay focused on the big picture. In other words, stay on the path.
Take whatever moments you can to refocus on what is most important for you and the longevity of your company. What type of growth is manageable? How would meeting goals impact your daily responsibilities and budget? And finally, is that something you actually want? Take the time to reflect on questions like these because as the owner of a business, these decisions don’t just impact your job. They impact your life. These questions lead to decisions which will directly impact the success of your business, and consequently your ability to build your net worth.