How Adjusted Net Worth Works?

An adjusted net worth provides you with an overview of the financial health of your business. You can calculate the adjusted net worth using a balance sheet. When calculating the adjusted net worth using a balance sheet, you should list all the assets and liabilities you own. After that, you must subtract the liabilities from the assets to get the adjusted net worth of your business. You must indicate how long you could potentially own the asset—it can be either long-term or short-term.

Short-term assets refer to assets that you can sell within a year, while long-term assets take more than a year to sell. This includes machines and raw materials that can be used in future productions. You can also categorize business liabilities in the same manner.

After you have successfully subtracted liabilities from assets, you will get the adjusted net worth of your business. When you compare it with the adjusted net worth of other companies, you'll be able to see if the value of your business is increasing or not.

Adjusted Net Worth Example

A restaurant is operating paycheck to paycheck, so to speak, just barely paying all of its monthly expenses. The owners know that restaurants generally operate at a significantly smaller profit margin than other businesses. Still, they want to see if their position is normal compared to other restaurants in the area. Are they growing as a business, or are their expenses holding them back?

First, they list all their short and long-term assets and their projected values. These include everything from the stoves in the kitchen to the salt and pepper shakers on the tables. Next, they factor in their liabilities—electricity, the business loan, etc. After subtracting the liabilities from assets, they find that their adjusted net worth is higher than they expected. But when comparing with their monthly profit, they still do not have too much wiggle room. When they approached other restaurants, they found that they are in similar situations.

Still, the restaurant owners want a little more freedom with what they can do. They decide to make a strong effort to pay off their business loan by stopping catering services—which they didn't do well with anyway—selling the equipment (long-term assets) and putting that money towards the loan's principal (liability). A few months go by, and the owners have successfully paid off their loan. They run another adjusted net worth and see that the total of their assets dropped, but so have their liabilities—and their adjusted net worth is higher than it was before. Because the drop in liabilities outweighed the drop in assets, they are in a significantly better situation than when they started.

Significance of Adjusted Net Worth

Calculating the adjusted net worth of your business will keep you updated about the financial health and future of your business. It will show you if your business is operating at a profit or loss.

In a situation where your business is not doing well financially, you will decide whether taking out a loan or cutting down on expenses will be the best way to save your business from crashing. You'll also see if there's any way to liquidate assets to make up for losses and what liabilities may be holding you back.

When you can see where your business falls financially, you can make better-informed business decisions. This means choosing the appropriate partnerships, creating annual budgets, and allocating resources for business goals.