Entrepreneurship offers a myriad of opportunities and benefits, including the chance to enjoy complete financial freedom. Financial incentives are often what drive many entrepreneurs. As such, many business founders have a tendency to bet everything they own on their business, all in an effort to secure that financial freedom. While such drive and dedication is certainly commendable and is often what it takes to found a successful company, putting everything into your business may not always be the best financial move. The truth of the matter is that not every entrepreneur will end up being the CEO of a unicorn with a billion-dollar valuation and a buyout offer that will allow them to ride off into the sunset.
Regardless of where you are with your business right now, you need to know where you stand financially, and be able to calculate your true net worth. If you're not able to do that, you just might find yourself in for a rude awakening one day when you discover that everything you have worked to achieve is not worth the amount you believed.
Calculating your Net Worth can be complex and confusing, to learn how entrepreneurs can calculate theirs, I spoke with Paul Adams, founder and CEO of Sound Financial Group, an investment advisor based in Bothell, Washington who combined manages over $350 million for his investors. What makes Adams stand out from other financial services firms however are his entrepreneurial genes. As a long time member of the Entrepreneurs' Organization, Paul has personally seen the financial habits of some of the most successful entrepreneurs in the world, giving him the unique combination of entrepreneurial intelligence and financial investment intelligence.
The Real Way to Calculate Your Net Worth
How do you calculate your true net worth? This is the problem that many entrepreneurs encounter. Ask two different people and you are likely to receive two different answers. It usually comes down to how the bank views your balance sheet versus how you view it.
For entrepreneurs, it is important to first realize that when they are ready to retire, it will be on what is reflected on their personal balance sheet rather than their business balance sheet. In fact, entrepreneurs are often surprised to discover they can only rely on the money reflected on their personal balance sheet for providing an income for themselves and their families.
In determining how to calculate your true net worth, keep the following five points in mind.
What do most entrepreneurs get wrong when calculating their Net Worth?
Paul Adams: The most important thing to consider is not what you should count, but what you should not count for your net worth. You see, banks will allow you to include all types of assets that will benefit them as a lender, since those items are things that can be used as collateral for loans. Such items often include homes, vehicles, boats, and even accounts receivable. When it comes to calculating your true net worth, however, you should only include your assets.
Where do Entrepreneurs seem to get confused the most?
Paul Adams: Entrepreneurs must understand what an asset is and be sure their spouse understands it, as well. The simple fact is that most people have different views of what an asset actually is. Furthermore, the true problem is that most people consider things to be assets when they are really liabilities. An asset is anything that can be used to generate money right now, or could be used for generating money in the future without altering your lifestyle. So what is included as an asset? Not your primary residence, although most people certainly think of it as an asset. Furthermore, that antique watch collection, your yacht, your prized sports car, your vacation home ... none of those things are assets. They are actually liabilities, since they will not add money to your balance sheet until they are sold, and doing so would most certainly alter your lifestyle.
Should Entrepreneurs count their businesses as an asset?
Paul Adams: One of the most common mistakes that many people make is including the value of their business in their net worth. While you may not like it, your business is only worth what someone is willing and able to pay for it, not what you think it is worth. As such, it should never be included in your true net worth.
What's the number one advice you'd give to Entrepreneurs reading this?
Paul Adams: Saving is vital to ensuring that you have a healthy net worth. Most people are stunned when they learn that their net worth is actually worth far less than they had imagined. Avoid the surprise and shock in the future and begin saving now.
Developing a solid understanding of your financials, including how to properly calculate your true net worth, is an essential element to succeeding as an entrepreneur. Regardless of whether you become the next Bill Gates or not, you will at least have the knowledge to know where you stand and how to reach your next set of goals.