How to Calculate Net Worth?
Learning how to calculate net worth is super easy; however, sometimes, it can become a very cumbersome job, especially when large listed companies and conglomerates are involved. Furthermore, calculating the net worth of a person can also pose various complexities when calculating celebrity net worth or the net worth of landlords or rich personalities.
However, the rule is simple for calculating how much money a person or a business has. That is, by deducting the assets from the liabilities. Of course, there is a lot more to it than that, so for further details, I suggest you read out the following complete article!
How To Calculate Net Worth?
Calculating net worth is super easy; all you have to do is subtract total assets from the total liabilities that you own. In simple words, net worth is your total monetary units without the interference of the liabilities that you have to pay off eventually.
This net worth can be both positive and negative depending upon the number of assets and liabilities. If the assets exceed the liabilities, you will have a positive net worth, which means that you have more monetary units than the overall liabilities. It also means that you are rich enough to pay off all of your debts without going bankrupt.
On the other hand, your net worth could also be negative when your liabilities exceed your assets. It means that you are highly indebted and you are running a high risk of bankruptcy. In simple words, it means that you don’t have enough money to pay off your debts.
Net Worth In Business
The net worth in business is commonly known as the shareholders’ equity, and it is calculated by deducting the total assets from total liabilities. The pattern of sheets on which all these things are calculated is called the Balance Sheet.
However, you must keep in mind that a Balance Sheet does not show the current market values of the assets. Rather, it shows the historical values. Lending institutions deeply scrutinize companies’ financial statements before giving out loans. If the assets are less than the liabilities, the financial institutions will back out from lending the loan.
Of course, there is a large risk that the balance sheet might not represent a true and honest view of the total net worth of the business. This happens when the top management fears depicting the poor performance of the business or wants to manipulate the financial position of the business in order to meet goals.
To avoid these problems, auditors are hired by the shareholders of the company, who check the figures presented on the financial statements prepared by the management. These auditors perform various kinds of tests and control over the financial information and then issue an audit report that contains the verdict of the audit.
It’s clearly mentioned in the audit report whether the financial statements depict the correct net worth of the company or not. So, it provides ample evidence of correct reporting to the lenders and shareholders.
Net Worth In Personal Finances
The net worth of a person is far easier to understand than it is to understand the net worth of a business. This is because a person’s finances are way easier to manage since there are no complex funds or finances that need decluttering.
The assets are the monetary unit that he owns; it could be a house, cash, furniture, and so on. On the other hand, his liabilities would include his utility bills, credit card balances, personal loans, and taxes. The monetary assets that you have left after paying off or deducting all of your liabilities from your assets is your net worth.
What is a good net worth?
It is a highly judgmental question since various people can have various opinions on this matter. However, if you ask for my own personal opinion, I would say that a positive net worth is a good net worth. It means that you have the money to pay off your debts without taking on more debts.
Is it easy to calculate a person’s net worth?
Yes, calculating a person’s net worth can be pretty easy if he/she does not have his money invested in complex funds or business dealings. This is because you will have to calculate the fair market value of those investments before you can calculate the net worth. However, if that is not the case, then you could simply deduct the assets from the liabilities.
Why is it hard to calculate the net worth of a large company?
It is specifically hard to calculate the net worth of a large company because it has a huge number of assets and liabilities. Not to mention, it could also own such assets that require a valuer to value their fair value.
The Bottom Line
So, that’s all the information that you need in order to understand how to actually calculate the net worth of a business and a company. If you want to calculate your own net worth, it should be fairly easy since you will just have to jot down all the assets that you possess, including properties and equipment, etc., and all the liabilities that you own. Once you are done writing up each and everything, all you have to do is subtract the asset side from the liability side.
The resulting figure will be your total net worth. On the other hand, calculating the net worth of an entire business is complex. This complexity increases with the magnitude and scope of a business, so the job of calculating the net worth of a large business should be left to qualified professionals.
