The net worth of a business is also known as its book value, or as its owners' (stockholders') equity. This figure can be computed relatively easily using information found on a company's balance sheet. However, even if the balance sheet isn't available, you can still calculate a business' net worth if you have some basic financial information.
Starting with the basic accounting equation that describes the relationship between assets, liabilities, and owners' equity:
Assets
Everything a business owns is considered to be an asset. There are two main categories of assets to be aware of. Tangible assets include anything you can see, such as cash or real estate. Intangible assets include things that have value but aren't physical items and can be tougher to value. For example, if a business has a strong brand name, it can result in the ability to charge more for than competitors for similar goods or services and therefore has some monetary value. Other types of intangible assets can include trademarks, patents, and industry knowledge, just to name a few.
There are many types of assets, which can include, but are not limited to:
- Cash and short-term investments.
- Receivables.
- Inventory.
- Buildings and land.
- Equipment.
- Intangible assets -- such as a business' brand name, patents, or goodwill.
- Long-term investments.
Liabilities
The opposite of assets, liabilities represent the obligations of a business. Common forms of liabilities include:
- Accounts payable -- goods or services purchased on credit from a supplier.
- Wages payable.
- Accrued expenses.
- Debt (short- and long-term).
- Interest payable.
- Deferred income taxes.
An example
Let's say that you own a business, and that the assets listed on your balance sheet are as follows:
And, you currently have the following liabilities:
So, in this example, to to determine the net worth of your business, you can simply subtract your business' liabilities from its assets.
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