Are you happy with your net worth?
Do you have a goal for what you would like your net worth to be in five years?
Do you know what your net worth is right now (in your business and personally)?
Your Net Worth
To me, one of the best measures of financial success is net worth. Your net worth is the value of your assets minus your liabilities.
If you have $1,000,000 in assets, and no debt, your net worth is $1,000,000.
If you have $1,000,000 in assets, and $750,000 of debt, your net worth is $250,000.
A strong net worth creates a level of freedom that many people would cherish if they only gave themselves a shot at it.
Here are the four drivers of a strong net worth in your business:
- Cash flow – Strong cash flow is the secret to growing your net worth. Generating excess cash goes a long, long way toward helping you grow your net worth. See my post of the four drivers of cash flow here.
- Allocating capital wisely - Allocating your excess cash flow wisely is about deciding how much to retain and re-invest in your business and how much to distribute to owners. That's the beauty of a business that generates excess cash. You have the money to continue to invest and build your company. Or you can distribute some (or all) of the excess cash to the owners so they can invest in assets outside the business. Both are designed to help you increase your net worth over time.
- Managing risk – Managing risk is about being wise with debt and ensuring you take risks in a measured, calculated fashion. And making sure that you are insuring risks adequately and considering worse case scenarios as you invest and grow. The last thing you want to do is create a strong net worth only to have it wiped away with one bad decision.
- Driving the value of your business – Making your business worth more and more money over time will have a huge impact on your personal net worth. That means ensuring the business can function without you, that systems and repeatable processes exist to ensure customers are happy, that you have the financial side of the business under control, and always working on ways to improve the business and drive profitability and cash flow higher.
Financially speaking, I believe the goal in business is to generate above average profitability and cash flow while making your business worth more and more money every year.
Do that well and you are on your way to enjoying a sizeable net worth!