Starting a business of any kind requires capital. The only difference is the amount of capital needed. There are some businesses that will require more capital to be established than others. Other than the type of businesses you are willing to start, the size of the company also determines the capital you will require. Part of the money you would have raised to start a business will be used to acquire the assets. Assets are very important in a business.
There are two types of assets, the tangible assets, and the intangible assets. Also, a business cannot run without incurring expenses and other types of payments such as tax and debts. All these expenses fall under liabilities. As a business person, you should work more to increase the assets while reducing liabilities. This will have an effect of increasing the net equity of your business. Net equity is simply the difference between the value of all the assets and that of total liabilities. One precaution that is taken during the calculation of Net Equity is that it should be at a fair market price.
There are certain reasons why knowing the net worth of your business is very important. One, it is more accurate of measuring the wealth and financial status of the business. Wealth is what you remain with after paying all the bills. The best way of knowing that is through the calculation of net equity. The other reason is that it can help you in tracking the financial progress of the business. By comparing the values you get either monthly or quarterly, you will be able to know whether your business is making progress or not.
The other reason why it is important to know the net worth of your business is that it helps in putting your debt levels in perspective. In an ideal world, a business should not have any debts. However, in the real world, these debts are there to be dealt with. Large debts can be very scary. Calculating the net equity will allow you to see the impact of the debts when compared to the assets. Therefore, you can do anything possible to reduce your debt to a recommended level.
The Importance of Knowing the Net Equity of your Business