Net worth: What it is and how to calculate it for business

Published Friday 12 December 2025

Table of contents

• What is net worth?
• Why net worth is important for small businesses
• How to calculate net worth
• Net worth vs. equity
• Net worth vs. profit
• Tracking net worth over time
• How to improve your business net worth
• Track your business net worth with confidence
• FAQs on business net worth

Key takeaways

• Calculate your business net worth regularly using the formula Assets minus Liabilities to track financial health and identify trends that signal either stability or potential problems before they become critical.

• Prioritize increasing retained earnings by keeping profits in your business rather than distributing them, as research shows low retained earnings relative to total assets are among the best predictors of business failure.

• Focus on reducing high-interest debt first while renegotiating loan terms with lenders to lower your total liabilities, which improves net worth just as effectively as increasing assets.

• Track your net worth monthly or quarterly using automated accounting tools to maintain accurate records, reduce calculation errors, and make informed financial decisions based on real-time data.

What is net worth?

Net worth is the total value of your business’s assets minus liabilities. It shows your financial health at a specific point in time.

Positive net worth means your assets exceed liabilities, signalling financial stability and growth potential.

Negative net worth means liabilities exceed assets, indicating financial struggles and potential insolvency risk.

Why net worth is important for small businesses

Net worth matters because it measures your business's financial strength. Here's why tracking it helps your business:

• Financial stability: Surplus assets provide a safety net during tough periods
• Growth funding: Higher net worth gives you resources to reinvest in expansion, as a high net worth often increases with economic performance, with UK data showing 38% of high-performing farm businesses have a high net worth compared to just 7% of low-performing ones.
• Cash flow management: Regular tracking helps predict cash flow patterns
• Early risk detection: Monitoring trends flags financial trouble before it becomes critical
• Investor confidence: Strong net worth reassures lenders and investors of your financial health. Here's how to find investors.

For example, if your net worth is high, you 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

Calculating net worth involves subtracting your business liabilities from assets. This simple calculation gives you a clear picture of your financial position.

Net worth formula explained

To calculate net worth, use this simple formula:

Net worth = Assets – Liabilities

Assets include everything your business owns with financial value:

• Cash and liquid assets: Money in accounts and short-term investments
• Property and equipment: Real estate, machinery, furniture, and vehicles
• Inventory: Goods for sale and raw materials
• Accounts receivable: Outstanding customer payments

Liabilities are your business's financial obligations and debts:

• Loans and financing: Business loans, mortgages, and borrowed funds
• Accounts payable: Unpaid supplier invoices
• Accrued expenses: Outstanding wages, taxes, and costs
• Lease obligations: Rental agreements for space and equipment

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

Common calculation mistakes can affect your net worth accuracy. Avoid these pitfalls:

• Asset valuation errors: Use correct valuation methods for different asset types
• Missing liabilities: Record all debts, including interest and small amounts
• Outdated calculations: Recalculate regularly as net worth changes over time
• Poor record keeping: Ensure complete, accurate data for reliable results

Using a net worth calculator and other tools can help you keep accurate records and automate your calculations. This reduces errors and gives you more confidence in your numbers.

Net worth vs equity

Net worth and equity both measure the value remaining after subtracting liabilities from assets.

Net worth typically describes overall business value. Equity specifically represents an owner's stake in the company, used mainly in finance and investment contexts.

• 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 finances:

Net worth shows your overall financial position at a specific time. It's calculated as assets minus liabilities and appears in the equity section of your balance sheet.

Profit measures short-term business performance. It's the income remaining after deducting expenses from revenue, reported on your profit and loss statement.

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

Tracking net worth over time

Tracking net worth over time requires regular recalculation because it shows your financial health at specific moments.

Update regularly using current asset and liability figures from your balance sheet. Regular reviews help you track progress, spot trends, and make informed business decisions.

Automated tools simplify this process. They give you real-time updates, reduce errors in your calculations, and help you spot patterns in your business performance.

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

How to improve your business net worth

Improving your business net worth strengthens financial health and supports growth. Here are three proven strategies:

1. Increase your assets

Increase your assets by growing their total value:

• Invest in revenue-generating assets: New machinery improves capacity while real estate generates rental income
• Diversify income streams: Expand into new products, services, or markets

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 in our guide to increasing revenue.

2. Reduce your liabilities

Reduce your liabilities to improve net worth just as effectively as increasing assets. Keeping debt in check is critical, as some sectors have seen liabilities grow significantly; for instance, recent UK data on farming showed the largest rise in debt for specialist pig and poultry farms, with average liabilities increasing by 22% in one year.

• Prioritise high-interest debt: Repay expensive loans first to reduce total costs
• Renegotiate loan terms: Discuss lower rates or extended repayment periods with lenders

Learn more in our guide to managing debt.

3. Manage your finances well

Manage your finances well to naturally build net worth through efficient operations. Research shows that small and medium-sized enterprises (SMEs) with well-developed financial capabilities are more likely to experience rapid growth while maintaining a low-risk rating.

• Follow a budget: Allocate resources to growth while preventing unnecessary spending
• Track expenses closely: Monitor spending to reduce waste and identify cost savings

Learn more in our guide to budgeting and forecasting.

Track your business net worth with confidence

Track your business net worth using automated tools that reduce manual errors and give you real-time insights.

With Xero, you can maintain accurate net worth tracking by:

• Using current data: Automatically updates with your latest asset and liability figures
• Providing detailed reports: Clear financial reports support better decision-making

Ready to simplify your financial tracking? Try Xero for free and see how easy managing your business finances can be.

FAQs on business net worth

Common questions about calculating and using net worth for your business.

What's the difference between net worth and revenue?

Net worth measures your total business value (assets minus liabilities) while revenue is the income your business generates from sales. Revenue affects net worth when retained as profit.

How often should I calculate my business net worth?

Calculate net worth monthly or quarterly to track financial health trends. More frequent calculations help you spot issues early and make informed business decisions.

Is negative net worth always bad for a business?

Not necessarily. New businesses often start with negative net worth due to startup costs and loans. Focus on improving the trend over time rather than the absolute number.

Can I use net worth to get a business loan?

Yes. Lenders use net worth to assess your business's financial stability and ability to repay loans. Higher net worth typically improves your chances of loan approval and better terms.

What's a good net worth for a small business?

Good net worth varies by industry and business age. For example, the average net worth per farm in England was £2.4 million in 2023/24, a figure that would be very different in other sectors. Focus on positive trends rather than comparing to other businesses. A growing net worth indicates improving financial health.