Have you sat down recently and calculated your net worth? It’s a great (and sometimes terrifying) exercise. Basically, you add up everything you own, subtract everything you owe, and the result is your net worth: an overall picture of whether you’re coming out ahead at this particular point in time.
It seems straightforward, but it can actually be kind of confusing: What exactly do I include in my calculations? What if I run a business on the side (which I do)—or even as my full-time gig? Do I include all of that when figuring this out?
If you’re lucky enough to run a business, no matter how large or small, eventually you’ll want to know how it affects your own bottom line. Here’s how to figure that out.
Understand your personal net worth first
Just a reminder: your net worth is not set in stone, and it’s not a reflection of your worth as a person. It’s just a snapshot of where you are right now. Just like your age, it ain’t nothing but a number … but unlike your age, you can always change it.
How to calculate personal net worth
Before you add your business value to the mix, first figure out your personal net worth. Using paper, a spreadsheet, or a worksheet (like this one), markdown each asset you own and the debt you owe. (It helps to gather paperwork before you get started.)
Try to collect everything you can think of that relates to your money, so you have it all in one place. Record all of your assets and all of your debts and find the difference: that’s your net, or overall, worth.
When I talk about assets, I mean everything you own of value, or what you would get if you sold that particular thing. If you have a car and you can sell it for $7,000, that’s a $7,000 asset. You might have paid $20,000 for it, but what matters is the current value. Write down the asset as well as its current value.
Examples of assets:
- Cars, trucks, or boats.
- High-value personal property like wedding rings, watches, or art.
- Bank accounts.
- Retirement accounts.
- Your home and/or other property.
- Any stocks, bonds, or other investments.
- Insurance policies you could cash in.
- Business interests (more on this in a minute).
Now comes the more depressing part: you’ll need to list out all your liabilities — in other words, your debts. Include the exact figure you still owe; this is why you have to hunt down that paperwork. You might think you’ve paid way more on that student loan than you actually have when you take compound interest into account.
Examples of liabilities:
- Student loans.
- Personal loans.
- Auto loan.
- Credit card balance (total for all credit cards).
- Other financed purchases (For example, if you financed furniture or have a store charge card).
- Other long-term debt, such as medical bills, back taxes, or liens or judgments against you.
When you have everything listed out, simply do the math.
How does your business affect your net worth?
You don’t have to include your business in your net worth calculations — but its failure or success can affect your financial life, so it can be helpful to figure it out. Also, your business interests are assets that you could theoretically sell if you needed to offset debt.
You can evaluate it differently depending on how your business is set up: sole proprietorship, LLC (limited liability company), or corporation.
As Novo phrases it,
“Small companies with limited liability, sole proprietorship, or partnership, declare income taxes in the personal tax returns of their owners.”
In other words, the more closely linked your business is to your personal finances, the more it makes sense to include it in your net worth.
How much of the business is “yours”?
If it’s just you, doing what you do best, you might operate your business as a sole proprietorship, which is the method with the least hassle and formal documentation. However, sole proprietors are personally responsible for their business’s debts. You record your profits and losses on your personal tax return, so you might as well include your business’s assets and debts when calculating your personal net worth.
A freelancer is a great example of someone who might run their business as a sole proprietorship.
Or, maybe you have a one-member LLC for your business. As the name suggests, this form of company limits your own personal liability in the happenings of the company, which could come in handy if the business experiences a downturn.
Your losses and earnings can “pass-through” to your personal tax return this way. LLCs can (and in some states must) have more than one member, too, so you might have a business partner operate as a member of the LLC.
Is your business an S-corp or C-corp?
Finally, you may have incorporated your business as an S-corp or a C-corp, both of which require lots of documentation and formal procedures. However, setting up your business this way puts the most distance between your personal finances and your business finances.
You can still include your business interests — the equity or stock in the company — in your net worth calculations to give yourself a fuller picture of the assets you hold.
What your business is worth
At least 23 million Americans own a sole proprietorship, and there are more individually owned businesses in America than there are corporations. So if you own your own business, you’re definitely not alone. But whether you’re a casual freelancer or a million-dollar player, you probably want to know what your business is worth.
The short answer is, the worth varies depending on who’s asking. If it’s a lender, investor, or buyer, the evaluation will probably include an idea of the profitability of the company over time.
This is often found using a multiple of the EBITDA (annual earnings before taxes, depreciation, and amortization). For example, if your EBITDA is $50,000, the value of the business might be, say, $150,000.
But personally, your business might be closely linked to your net worth because it’s your livelihood or income — and you also control some or all of its assets and debts.
What assets does your business have?
For example, if you run a handmade candle shop on Etsy, your assets might include the stock of completed candles, shipping materials, and supplies for making your merchandise, in addition to the cash in your business bank account. If you’re a real estate agent, your assets might also include something more intangible, such as your reputation.
Your business assets might be fixed, long-term things such as office space or machinery. Business assets can also be current, or short-term, things. These assets would include things that you could turn into cash a little more easily, such as inventory, accounts receivable, or stock holdings.
You have to take into account the money you owe to vendors, subcontractors, lenders, or leaseholders. These make up your business’s debts.
Your business’s revenue or profit is the amount it brings in minus the cost of doing business—hopefully, it’s a net positive amount! Someone with a graphic design business would add up all the income generated from design fees, subtract costs such as software and expenses, and arrive at their net profit.
So if you’re a full owner, or director, of a sole proprietorship or one-member LLC with $75,000 in equipment and property, $25,000 in cash in the business, and an outstanding business loan of $15,000, you have $85,000 in equity in your business, or the difference between what you own and what you owe. (Assets – liabilities = equity).
It’s a positive figure, so include it in your assets when figuring your net worth.
Always make sure you separate your personal and business accounts
No matter how you have your business set up, you need to protect those assets that are the basis of your net worth. Even if you’re a sole proprietorship, you should separate your business finances from your personal finances — it makes tracking your income and expenses much easier and simplifies things at tax time.
One of the best things about banking with Novo is how perfectly tailored it is to the business owner. Unlike some other business bank accounts, you can sign up for Novo online quickly and easily, and there aren’t any hidden fees.
I love that you can even integrate your most commonly-used business management apps, like Slack, to make doing business even more efficient. Novo lets you do important banking tasks electronically, including transfers and even mailing checks.
Knowing how your business affects your personal net worth can be quite important in figuring out your finances. Hopefully, both your business and personal bank accounts will continue to grow, adding value to your bottom line.
Knowing exactly where you stand can help you make better decisions, meet your goals faster — and maybe even convince you to let yourself take a much-needed vacation from work.