Small Business Owner’s Equity – Everything you Must Know
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Keeping track of your small business owner’s equity is important if you own a small business.
Keep reading to learn what this is and how to calculate and increase it.
What is Owner’s Equity?
Like home equity, an owner’s equity is the value of the business minus any liabilities. So, for example, if a business is worth $500,000 and has $200,000 in liabilities, it’s worth $300,000.
Owner’s equity is what you’d walk away with if you liquidate your business today. The type of ownership determines how you’d receive the funds.
For example, if you own the business as a sole proprietor, you and the business are one – the money is yours. But, if you own it as a corporation, you and the business are separate entities. The owners are called shareholders and are second to be paid after any liabilities are satisfied if the company closes.
What’s Included in Owner’s Equity?
Owner’s equity includes any assets that remain in the business rather than getting distributed. When the company does well, the owner’s equity increases, and vice versa.
Common things included in owner’s equity include:
- Common or preferred stock
- Last year’s retained earnings
- This year’s earnings
Calculating Owner’s Equity
Understanding how to calculate owner’s equity is important for a business owner. Fortunately, it’s easy to calculate.
Total the company’s assets and subtract the company’s liabilities.
Ways to Increase Owner’s Equity
As a business owner, a top goal should be to increase the owner’s equity. Here’s how.
Rather than withdrawing all profits, consider reinvesting them in the business. This provides more capital to grow your company so you can make more profits moving forward. Reinvesting in your business also ensures you have a financial cushion, should you need it.
Pay Down Debts
Liabilities take away from your owner’s equity. Instead, try reducing your debts by paying them off and avoiding taking on new debts. Reducing debts decreases your debt-to-income ratio, increases your cash flow, and may help improve your credit should you need loans in the future.
Running a business is expensive, but that doesn’t mean you can’t save. Just like with your personal budget, revisit your business expenses and see where you can save. Maybe you shop around for different services or vendors to cut costs or find cheaper suppliers.
The final way is to avoid distributions. While you don’t want to do this all the time because you want to keep your shareholders (and yourself) happy, keeping more money in the business can increase the owner’s equity and make your business more profitable.
Small business owner’s equity is the bread and butter of your business. Learn how to calculate, manage, and make the most of it so you can achieve your dreams of owning a successful business.
If you have questions or concerns about owner’s equity and how to handle it, contact me today to learn more.
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