How do I record my small business in my net worth?
Tuesday, 17 September 2013 17:50

Hello Diana

I have been reading Financial Fitness for Beginners, and wondered if you have any material specifically helpful for running a home-based business. For instance, for a "very-small", home-based business (not incorporated); do we need to integrate all BUSINESS expenses and income into our tracking? Would our monthly net-worth calculations have to include the changing business inventory? (That would sure complicate things!) What about business line-of-credit use?? Thanks! Jane H.

Thanks Jane for your thoughtful questions. Congratulations on taking seriously the issue of your finances for both business and personal use.

There are lots of great resources for running small businesses, so I haven’t created anything specific to share with you on that subject. Go to your local library to check out books that appeal to you, as well as contacting the Chamber of Commerce which offers great business related material. If you don’t already belong to your local chamber or business club, I would strongly recommend you join as it provides great networking opportunities to grow your business, and also provides lots of mentors to give proven advice regarding good small business practices. It also makes running your own business a lot less lonely.

As to your question regarding your net worth, it is important that you do not “mix” your business with your personal finances. Operate your business as a separate entity and keep those books with all your revenue, expenses, inventory, write-offs etc. For the purpose of your net worth, just assign a fair market value to the business if you were to sell it.

What you include in your personal net worth is the asset value you have assigned your business and not your income from the business. In the early stages a small business may have a negative value, as you often have to either borrow money to jump start it, or invest more money than you can get an immediate return on in the beginning stages. If you are just getting started, you could assign it a value of zero (or even a negative net worth if you have borrowed money for the company). As it grows and your start up loan gets repaid, you can change the value on your net worth. Keep in mind this value you assign to it for the purpose of your net worth is simply a good estimate. Remember your business is an asset, just like a home and you want to record the “accurate” value to it. A net worth statement is simply a “snapshot” of what you currently own (your assets) minus your debts (liabilities). The bottom line will either be a positive net worth (i.e. you own more than you owe) or a negative net worth (you owe more than you own).

With a small business, especially a growing one, you may choose not to take out much in the way of income. This means that you are keeping the money in the business to help it succeed. This increases your net worth as the business is worth more. On the flip side, if you take out a significant income, then you may be leaving the business vulnerable with a lesser value.

The key for operating a small business is to keep it separate from your personal finances. At the end of the month, if there is a profit, you can take out a percentage of this profit as your income which you record as income on your Weekly Tracking Report. When you run a small business with variable revenues, then it is even more critical that you keep track of your weekly statement of income and expenses, in order to make sure you are not spending money that you have not already earned. If you do find that the income isn’t sufficient, this is when you would need to supplement your income from another source, or decrease your expenditures. See the appropriate chapters in Financial Fitness for Beginners for suggestions on how you can earn more, spend less or combine both for maximum benefit.

The number one reason for small business failure is that too many operators take out more money than the business can manage. They treat their business as an ATM machine. You always need to leave excess funds in the business to cover unexpected expenses or to be a in a position to take advantage of opportunities. .

To answer your final question - A business line of credit is very useful especially if you are in a product business, i.e. you have to purchase product upfront before selling it. The trouble with lines of credit is that most people don’t really treat them like a loan. Rather they consider it their “money” and tend to spend it accordingly. If you do use a line of credit to pre-pay for product be sure that once it is sold, that portion of the line of credit is paid off. If you are using the line of credit as operating capital, then it is a good suggestion to be sure that you are allocating a set amount to repay each month, otherwise your line of credit will never be paid off and you are limiting your access to credit when you could really use it. Depending on your own habits regarding debt, you may prefer to get a fixed loan that you repay rather than an open line of credit.

Thanks again for your inquiry. The good news is that you will be able to keep things simple. In summary, for your monthly net worth, simply include the “value” that you have assigned to the business each month. In your Weekly Tracking sheet for your personal finances, you include the actual income you take out from your business, as well as any other sources of income. With a small business you have to be relentless about keeping the business books up to date and you also have to be dedicated to recording your personal income and expenses on a weekly basis.

The fact that you are asking these questions and reading books to gain knowledge bodes very well for your success. Please keep in touch. Wishing you abundance in all things……Diana Young #1 – Amazon best-selling author www.financialfitnessbooks.com