Managing the Value of Your Business
The financial value or net worth of your business is calculated on its total assets and liabilities. Your business's balance sheet (which will be covered in Chapter 10) tracks the value of your business.
Assets
Assets include not only cash, inventory, land, building, equipment, furniture, and the like, but also money due from individuals or other businesses (known as accounts or notes receivable). Each of these assets requires your constant management. You must track each asset's value and make adjustments as needed to increase its value.
Accounting software packages can help you record and manage your consulting business's assets, liabilities, and net worth. Choose a package that fits the needs of your service business and is compatible with your accountant's system.
Liabilities
Liabilities are funds acquired for a business through loans or the sale of property or services to the business on credit. Creditors do not acquire ownership in your business, but promissory notes to be paid at a designated future date (known as accounts or notes payable).
Managing liabilities requires that you know what you owe, to whom, under what terms, and when it is due. You will constantly review these liabilities to ensure that they are paid when due with sufficient cash assets.
Net Worth
Net worth (or shareholders' equity or capital) is money put into a business by its owners or left in it as retained earnings for use by the business in acquiring assets. For sole proprietorships, this is the value of your business to you. If your business is a partnership, an LLC, or a corporation, the net worth is the value of your business less that distributed to partners, investors, and/or shareholders.
Valuation Formula
The formula for this structure is:
Assets = Liabilities + Net Worth
That is, the total funds invested in assets of the business is equal to the funds supplied to the business by its creditors plus the funds supplied to the business by its owners. If a business owes more money to creditors than it possesses in value of assets owned and retained earnings, the net worth or owner's equity of the business will be a negative number.
Assets - Liabilities = Net Worth
In addition to managing the services that your consulting service provides, it will be your job to manage the assets and liabilities that indicate its financial value.
