Business net worth: what it is and how to calculate it

What is net worth?

The basic net worth definition is simple: it's the total value of a business's assets minus liabilities.

Net worth = Assets – Liabilities

A business’s net worth provides a snapshot of its overall financial health. Generally, the higher your business’s net worth, the stronger your financial position. From a business perspective, a positive net worth – asset value is higher than liabilities – signals a healthy business with financial stability and growth potential.

But negative net worth means the business’s liabilities exceed its assets, indicating financial struggles and, potentially, the risk of insolvency.

Why net worth is important for small businesses

A positive net worth signals financial wellbeing and stability. It also helps small businesses:

• Improve financial stability – surplus assets act as a safety net to get you through the financial rough patches.
• Boost growth – a higher net worth gives you more resources to reinvest in your business.
• Manage cash flow – regularly tracking your assets and liabilities helps anticipate cash flow. Learn more about cash flow management.
• Identify risks early – monitoring net worth over time can flag financial trouble before it becomes critical.
• Attract investors – substantial net worth reassures investors and lenders that your business is financially sound. Here’s how to find investors.

For example, a business with a high net worth can expand without taking on excessive debt. But a declining net worth signals underlying problems that may force a strategic rethink to avoid financial problems.

How to calculate net worth

Understanding how to calculate net worth accurately is essential for tracking your business's financial health. Whether for business or personal finances, the calculation follows the same principle: subtract what you owe from what you own.

Net worth formula explained

To calculate net worth, use this simple formula:

Net worth = assets – liabilities

Assets are everything a business owns with financial value:

• Cash and liquid assets – money in business accounts or short-term investments
• Property and equipment – real estate, machinery, office furniture, and vehicles, for example
• Inventory – goods held for sale or raw materials
• Accounts receivable – payments owed by customers

Learn more about assets

Liabilities are financial obligations or debts:

• Loans and financing repayments – business loans, mortgages, and other borrowed funds
• Accounts payable – invoices from suppliers you’re yet to pay
• Accrued expenses – wages, taxes, and other outstanding costs
• Lease obligations – rental agreements for office space or equipment, for example

Learn more about liabilities

Net worth example calculation for a business

Here’s a basic example of a business’s net worth calculation.

The business’s assets are:

• Cash in the bank: £25,000
• Office equipment: £10,000
• Total assets: £35,000

The business’s liabilities are:

• Business loan: £20,000
• Credit line balance: £5,000
• Total liabilities: £25,000

Now, applying the net worth formula:

• Net worth = assets – liabilities
• Net worth = £35,000 – £25,000
• Net worth = £10,000

Here the business has a positive net worth of £10,000, indicating financial stability.

Common calculation mistakes

While learning how to determine net worth is straightforward, small errors can affect accuracy. Here are some common pitfalls to watch out for.

• Miscalculating your assets’ value – the valuation method used depends on the type of asset . Your accountant can help you value your assets correctly.
• Underestimating or omitting your liabilities – always record all your debts (including interest), no matter how small.
• Not updating net worth – net worth is a snapshot in time; recalculate it regularly.
• Inaccurate financial records – your calculations are only as good as your data. Incomplete or outdated data will skew your results.

Using a net worth calculator and other financial tools, like Xero’s financial tracking, can help you keep accurate financial records and automate your calculations to reduce errors, giving you confidence in your numbers.

Net worth vs. equity

Net worth and equity refer to the same concept: the value remaining after subtracting liabilities from assets.

Learn more about equity

Though net worth and equity calculations are connected, they provide different financial insights. While net worth generally refers to individuals and businesses, equity is mainly used in finance and investment contexts, and represents an owner’s stake in their company.

• In businesses with multiple owners, equity reflects how ownership is divided among shareholders.
• Any difference in net worth and the amount of equity on the balance sheet comes from specific equity items, such as retained earnings and paid in capital.
• Sole proprietors and partnerships often refer to equity as owner’s equity, while corporations use shareholder’s equity. Both mean the same thing.

Net worth vs. profit

Net worth and profit measure different aspects of your business's financial position.

• Net worth is calculated as assets minus liabilities. On the balance sheet, net worth is reflected in the equity section, showing the value remaining after all debts are paid, which helps assess financial health over time.
• Profit is used to gauge business success. It’s the income left after deducting business expenses from revenue. A business reports it on the profit and loss statement to measure its short-term performance by showing whether revenue exceeded costs over a set period.

While net worth and profit serve different purposes, profit directly affects net worth because any undistributed profit increases the business’s equity.

Learn more about profit and loss

Tracking net worth over time

Your business’s net worth captures its financial health only at a specific moment – so you’ll have to recalculate it often.

To keep your net worth up to date, regularly update it by using the asset and liability figures from your balance sheet. Reviewing net worth regularly helps track financial progress, spot trends, and make smart business decisions.

Learn more about balance sheets

Automated net worth tracking tools like Xero simplify this process by offering real-time updates, automated calculations that reduce errors, and analytics tools to help you find trends to help identify financial patterns and trajectories.

Factors affecting net worth

A business’s net worth fluctuates based on changes in:

• Profitability – higher earnings increase retained earnings if not distributed, boosting net worth
• Asset value – getting new assets raises net worth, while the depreciation on older assets lowers it
• Liability – paying off loans decreases liabilities, improving net worth
• Operating expenses – cutting costs increases profitability
• Business environment – economic downturns and market shifts can impact overall business performance

Three tips to improve net worth

Here are three financial planning tips to grow your business’s net worth and improve its financial wellbeing.

1. Increase your assets

Boost your business's net worth by increasing the total value of your assets. For example:

• Invest in revenue-generating assets – new machinery can improve capacity and lower costs, while real estate can generate rental income
• Diversify your income – expand into new products, services, or markets to create new sources of revenue

Recent research published in the Review of Managerial Science found that low retained earnings relative to total assets were among the best predictors of business failure. Or, put another way, keeping profits in the business is a key indicator of long-term success.

This is because retained earnings can:

• Self-fund growth projects without taking on debt.
• Provide a financial buffer to protect against unexpected expenses.

Learn more about increasing revenue

2. Reduce your liabilities

Lowering liabilities is just as important as increasing assets when improving net worth. To do this:

• Prioritize high-interest debt – repay loans with the highest interest first to reduce your overall repayment costs
• Renegotiate loan terms – talk to lenders about lowering interest rates or extending repayment terms.

Learn more about managing debt

3. Manage your finances well

A high net worth is a natural by-product of efficient financial management. So make decisions to maximize your profits and keep expenses under control.

• Follow a budget – a well-considered budget ensures resources are allocated to growth initiatives while preventing unnecessary spending and preserving cash reserves.
• Track your expenses closely – monitoring where money goes helps reduce overspending and highlights potential cost savings.

Learn more about budgeting and forecasting

Track your net worth with Xero

Missed transactions and manual errors make tracking net worth hit-or-miss.. Xero smoothes your process by:

• Using your latest assets and liabilities data for accurate figures every time
• Giving you detailed reports on your numbers to help your decision-making

Track your net worth with Xero’s financial reports