Monday, February 16, 2009

Net worth..!

What is your net worth? Have you ever wondered?

How does one compute the net worth of an individual? Does it includes only materialistic things or is there more to it than just that?

On what basis do you make a decision on a particular person? What are the key points you look at, for you to say…”Ha, There is the guy who will make something out of his life!!”… What are the criteria?

What about your own self-assessment? How much would you say you are worth? (Nope.. Don’t put yourself in Ramalinga Raju’s shoes) Does only the current money count or does the ‘potential’ within you, taken into account? What price would you put on yourself?

Lately there has been so much talk about net worth of a company; it made me wonder, what’s the net worth of an individual? How does one calculate such a thing? If tomorrow I want to bet on someone, on what criteria would I place my confidence in him/her?

I mean he/she might have enough money to last a lifetime but would that suffice? Would I be looking at more than that? It doesn’t take much time to lose money! What about some one who is bankrupt but has the potential to do a lot of things…Would I bet on such a person?

Lets look at a generally accepted formula to calculate the net worth of an individual or a company, in the corporate world..

Net Worth = Total assets - Total liabilities.


But,

It is important to note that formula for net worth measures only the book, or accounting value of a business. This amount is not usually the same as the market value of a business, which is the amount an informed buyer would pay to acquire the business in an arm's length transaction.

It is important to know that just as a credit score changes every day, your net worth also changes every day. Every time you make a decision, every time you venture into something new or ‘most often’ every time you don’t venture into something, your net worth keeps changing... If these things are constantly happening, is it possible to get a truly accurate depiction of one's net worth?


Definitely! If one is astute enough, one can always gauge anyone’s net-worth with enough knowledge in one’s hand…All it requires is some open-mindedness and the courage to accept what you see…


12 comments:

Divya Pavoor said...

Interesting. I agree that many times what you don't do increases your networth and it is not just about what you do.

dilip said...

:) Yep..Interesting indeed...
More interesting is the fact the number of times we do this analysis on others, every time judge someone..Don't you think so..:)

Rajesh Goli said...

Err.. but total assets always equal total liabilities in accounting ;)

Nikhil said...

@Dilip: Strange post!

@Rajesh: Assets = Liabilities + Capital! :-D

Anonymous said...

you equation is indeed correct,

In accounting
Assets - Liabilities = Equity
(Equity is same as NetWorth).

But NPV would be a better metric for cash starved people like me :)

dilip said...

@Goli:
Err..Is your MBA over? ;-)

@Nikhil:
Yep..i totally agree.. Its a "strange" post..:)

dilip said...

@Anonymous:
Thanks for validating...:)
Maybe we can increase your NPV, if you reveal your name..:)

Sagar said...

I hope you did not think I was being anonymous. :)

Like people rightly pointed out Net Worth for an organization is Assets minus external Liabilities, which comes to the owner's equity. And since you were talking of individuals here, you were perfectly right in stating your equation. :)

The Balance Sheet itself is a snapshot on a particular date; you would expect Net Worth also to be a snapshot and not a rolling figure.

Ideally, you would apply conservatism for this computation, which means, it is computed at current value and not on potential. The moment you bring in potential (rise or fall), you bring in speculation. And that is when you utilize other sources of information (nature/line of business, customer base, growth in the past, P&L, Cash Flows etc) to give more confidence to your speculation.

Well thought, well written. Interesting stuff. Keep going.

dilip said...

@Sagar:
Nope..I didnt think so..Anonymous's comment didnt fit you..;)
Yep...Absolutely..."speculation"...Very true...Conservatism vs Speculation, which one do you bet on?

Divya Pavoor said...

Good point - Conservatism vs speculation. Graphically speaking, I would say your conservative networth is the offset on which you could chart speculatory growth.

dilip said...

@Divya:
sometimes you could cook your conservative growth..:):)

Sagar said...

I bet on "Informed Decision" with valid information and due analysis. :-)