Your net worth is an important number to know. It’s how much cash and assets you have minus how much debt you owe.
But when you own a business, your net worth gets a bit more complex—and exciting.
As an entrepreneur, you have more leverage to manipulate the net worth formula. You can create wealth through your business from profit, income, and because your business is an asset, through the sale of it.
I know that owning a business doesn’t automatically make you a money-making machine. In reality, the path to a healthy net worth is a result of both business savvy and disciplined personal financial habits.
In this article, I’m going to talk about the many things that can impact your finances as a business owner—and how to use those inputs to build your net worth.
Calculating your net worth as a business owner
First, how is net worth calculated? It’s a fairly simple equation.
Assets are anything of value that can be easily turned into cash. Here’s generally what’s included in your personal asset category:
- Investments, including 401(k) plans and other retirement plan balances
- Real estate
- Other stuff that’s valuable, like a guitar or violin
- The value of your stake in the business
(A quick-and-dirty way to calculate the value of your ownership is to use a multiple of revenue. For example, some businesses are roughly valued at three times their revenue. There are a handful of valuation methods that can help here, and often third-party firms can be useful too.)
Liabilities are your debts, or anything you owe. Here are some examples of things that are debts:
- Student loan balance
- Credit card debt
- Car loan
- Personal loans
- Anything you may have financed that you’re making monthly payments on
Now that you know how to calculate net worth, how do you actually build it up as a business owner? Here are six real tips on how to do just that.
Step 1: Understand the relationship between business and personal debt
Debt gets a really bad rap. When you have too much debt and not enough income, debt can feel like a heavy blanket, weighing you down.
- Too much personal debt can bring down your net worth
- Too much business debt can impact your cash flow
But debt can also be a helpful tool if it’s used properly. For instance, if you don’t have enough capital (cash) to invest and grow your business, you may consider using debt.
Debt is generally not the best option —already having capital is—but much of the economy is built on debt and a lot of economic growth has been fueled by it. Many a small business has gotten their start or were able to grow because of taking on debt.
When we’re talking wealth and ways to create it, debt has its place in the equation, but it should be used wisely.
Let’s say you’re facing crushing credit card debt. In both your business and personal life, a stepping stone on the path to getting debt-free often involves refinancing what you owe into a fixed loan.
Fixed loans often have lower interest rates. This may result in:
- A lower payment
- A fixed amount that you’re borrowing
- A fixed payback schedule
As long as you make your payments on time, you can see the light at the end of the tunnel. If you get a fixed loan, you might be able to go from paying (as an example) $1,000/month in credit card payments to $500/month. You can then save or invest the difference.
The general rule of thumb with refinancing is that you should only do it if you can save on interest or shorten your payback time.
Debt can also be the canary in the coal mine. If it starts to creep, then you know you need to pause and look into why it’s creeping. Have expenses gone up and has income gone down, or maybe both?
If you want to build your net worth, you need to keep an eye on your debt balances.
Step 2: Be mindful about growing your business too quickly
Growth comes at a cost. Literally.
If you sell a product, you need to have purchased enough inventory to meet a growing demand. If you provide a service, you need to make sure you’re ready to provide the service to your growing customer base.
Perhaps you own a bagel shop. You want to expand either by offering more products, staying open later, or expanding to a new location.Even if the demand is there, you need to ask yourself:
- What is the initial investment required?
- How will your monthly overhead be impacted?
With a bigger monthly overhead, you have to sell more to stay stable. Can you do that?
Or maybe you run a law firm. You don’t have enough time to take on any new clients, but you’re missing out on profit. Expanding the team means you have to ask yourself:
- How much will I spend on salaries and benefits?
- How much time do I need to invest in getting the new team up to speed?
Growth, like many things, can be good. But taken to extremes, the cost of high growth is steep. Sometimes chasing growth for growth’s sake means investing your company’s profits in an always-moving target.
This can leave your business with very high overhead and no real final destination.
Ultimately, what’s important is growth that’s based on your goals for the business and for you, the business owner. Someone planning to sell their business in five years will probably have different growth goals than someone who wants to run a company of one for the rest of their life. And that’s okay.
The person who is trying to grow a sellable business might take on more investors or debt to grow the company quickly, so that it will be worth more once it sells. On the other hand, the person running a life-long company might turn away business after a certain threshold because it means having to hire a team. That fundamentally changes an owner’s day-to-day, and if you don’t want that, you can say no to it.
Step 3: Take calculated risks
Without risk, there is no reward. And the greater the risk, the greater the potential of the reward.
This is called the risk-reward relationship. It’s fundamental in both the investment and business worlds.
Starting a business can be risky. If you want to mitigate that risk, you need to do your homework.
- Know the industry you’re entering inside and out
- Understand your target market
- Have some cash in the bank for a little bit of runway
Building your net worth is all about staying informed, and continuing to assess risks and whether or not to take them.
Deciding to offer a new service or product is risky because it requires you to invest resources into creating and launching it. If it does well, you’ll probably earn more money. If it doesn’t do well, you probably won’t recoup the time and money you put into it. That’s a risk every business owner takes—but your odds of success will be greater if you weigh the potential risk vs. the potential reward before making a move.
Step 4: Beware of lifestyle creep
The frog in boiling water is a fable describing a frog slowly being boiled to death.
If the frog is put directly into boiling water, it will jump out because it’s too hot. But if the frog is placed in tepid water, and the temperature slowly increases, it won’t notice the changing temperature and will be cooked to death.
(Bear with me.)
Lifestyle creep is the slow, gradual increase in your expenses that coincides with your income increasing. It’s when former luxuries become current necessities because you’re more flush with cash.
It sounds silly, but most of us have already experienced this. Think back to when you got your first job and your first paycheck. Mine was at a smoothie shop and it was something like $300 for two weeks of work—which at the time, I thought was awesome. (Back then, going to a restaurant with $18 entrees was reserved for nice occasions.)
Fast forward only six years later, and my new boss at my new adult job would send me out to pick up lunch for the office: $18 turkey burgers for a casual sad-Tuesday lunch at our desks. And before I realized it, that felt normal.
Lifestyle creep can happen in your business too. I’ve seen business owners move from co-working spaces to fancy offices, effectively jacking up their monthly overhead by several thousands of dollars. And even I find myself justifying another not-cheap conference because I can “write it off.”
The antidote to lifestyle creep is not a glamorous one. You have to find a way to stick to a budget.
It’s a little bit of discipline that actually gives you a lot of freedom. It’s staying aware and conscious about how you’re choosing to spend your energy and your resources.
It’s easy to feel pressure to spend more when you earn more, especially when the people around you are doing it too. But I’m a huge proponent of trying to keep your overhead low and not taking on too many unnecessary expenses.
For an entrepreneur, that mindset keeps your business agile. Think about it—having extra cash can give you room to try something new or take your foot off the gas if you so desire.
The same thing goes for the personal side. There is a sense of freedom you have not only with extra cash in the bank, but feeling like your decisions are your own.
Step 5: Don’t get caught up in other people’s crap
I live in Los Angeles. Although it’s quite spacious, there are a lot of people who are all up in each other’s crap—every single day.
So even if you were having an incredible day and you literally just meditated, you will drive into a Trader Joe’s parking lot and other people’s stress will certainly be taken out on you.
My biggest struggle when it comes to staying focused on building my net worth has been not letting other people’s crap influence me.
Some days I feel awesomely independent. I’m ruthless about unnecessary expenses by generally consuming less than I create. But other times, I’m not.
I have to go out of my way to stay on my own course and not let someone else’s warped ideas of happiness mess with me. I have to refocus and ask myself what I really want.
In business, this means asking yourself what’s best for you and your company.
- Do you want to grow your business?
- What would that mean for your overhead?
- What would that mean for your daily work responsibilities and commitments?
- And do you want that?
It’s important to spend time reflecting on what you really want out of your life as a business owner. Because being a business owner isn’t just a job. It’s your life.
I think it’s this small habit that helps me make good business decisions. And these little decisions add up over time.
Thinking about your net worth as a business owner is a small shift into bigger thinking.
When you evaluate your options through the net worth lens, it allows you to zoom out and think about your future as a business owner (and the owner of your life) with a new type of financial awareness.