4. Equity Valuation
Owner’s Equity = Assets – Liabilities
The value of your assets minus your liabilities will result in an estimation of the value of your company’s capital. If this equation results in a negative net worth, this can be dangerous for a small business; it will make it difficult for to secure financing, which can be troubling for a company whose expenses are already eclipsing its profits.
If, however, a company has positive equity, this means that business owners have the option of acquiring capital by selling part of their business through equity, stocks and/or dividends.
In a sole proprietorship this is called the “Owner’s Equity,” in a corporation this is called “Stockholder’s Equity,” and it can include common stock, preferred stock, paid-in capital, retained earnings, etc.
“Equity” may include:
Opening Balance Equity: the initial investment into the company
Capital Stock: the common and preferred stock a company issues
Dividends Paid: profits paid out to shareholders by a company (applies to corporations)
Owner’s Draw: portion of the revenue used by company’s owner (applies to sole proprietorships)
Retained Earnings: the sum of a company’s consecutive earnings since it began
Having an Income Statement will assist you in filling out this section, since it helps you determine the Opening Balance Equity and the Retained Earnings.
Accounts Payable: money owed by a business to its suppliers or partners
Business Credit Cards: company credit card bills due
Operating Line of Credit: any money owed to a bank that has extended the business an operating line of credit
Taxes Owed: any federal and state taxes owed for one year
Wages and Payroll: employee compensation, including wages, medical insurance, etc.
Unearned Revenue: any revenue garnered from a service or product that has yet to be delivered to the customer or client
“Fixed Liabilities” may include:
Long-Term Mortgages: property or building mortgage expenses
Bonds payable: long-term bonds owed to the government, as well as any interest paid on the bond (this interest is often semi-annual, and can be added to “Current Liabilities”)
Pension Benefit Obligations: the total amount of money the company owes to employee pension plans up to the current date
Shareholder’s Loan: a form of financing provided by shareholders
Car Loan: any long-term car loans on company vehicles (plus insurances costs)