Why Cash Flow Is More Important Than Net Worth

Daniel Penzing
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Net Worth is the Past, Cash Flow is the Future

Net worth is the amount of money someone owns. It’s a snapshot of where you are at any given moment. It’s the value of all your assets minus your liabilities. The higher the number, the more financially secure you are considered to be.

You might already know that money can be a complicated subject. Tons of different factors affect your net worth.

If the value of your assets goes up, then your net worth goes up. If you are looking to get a new loan for a car, your net worth becomes extremely important. Your lender will look at your total amount of equity and decide whether you can afford the loan.

It’s a simple formula: Net worth = Assets – Liabilities

Since assets and liabilities are easier to understand, this seems like a much simpler way to judge someone’s financial well-being than looking at net worth. On paper, they are very similar, but in practice, they couldn’t be further apart.

Investors Don’t Buy Net Worth

Investors don’t buy net worth, they buy cash flow. They want to buy companies with stables businesses that have the ability to pay and grow their pay checks for a long time.

Net worth is static, it’s an end-point. You work for a long time (or not) and end up with a static value. Cash flow on the other hand is a flow variable that can be increased quickly and dramatically, its a stepping stone more than an end point and it is a concept investors understand.

Cash Flow = Options

If you have looked closely at the lives and habits of successful people, you will find one commonality amongst all of them … cash flow.This is particularly true in the world of small business, where the difference between business success and failure can often be diagnosed by the amount of cash available for operations.

Cash flow is an indication of how many options or opportunities you have in a given period of time. It’s a measure of liquidity. It’s the lifeblood of any business.Without a healthy cash flow in the business, nothing else matters.

Cash flow is like the lifeblood of your business. Without it, it’s just a lifeless hulk of a company that’s not doing anything. If you don’t have a healthy cash flow, the business is struggling. And struggling businesses are likely to die sooner than later.

If you do have a healthy cash flow, you have the freedom of not being tethered to a big corporation or to an investor. You have the option to be an entrepreneur and to run your business the way you see fit. And you can use it to make smart investment decisions and to maintain your competitive advantage.

Use Net Worth to Generate Cash Flow

Both of these are important financial measurements to track because they provide insight into different things that are important to your financial health. And both will influence how much money you currently have on hand – but they each serve a different purpose. When you compare and contrast these, you’ll better understand how to monitor your financial situation.

Net worth, or net assets, is the value of everything you own (your assets) minus the value of everything you owe (your liabilities). Assets include the value of all your possessions, real estate, investments, bank accounts, and retirement accounts, but are not limited to those. As you might imagine, it’s difficult to calculate the net worth of an individual. In fact, there are many different net worth calculation tools available so you can track your progress over time.

Cash flow is the total amount of cash that comes in and out of your bank accounts each month. If you’ve ever tracked your cash flow, you’ve likely noticed that you spend most of your income each month. And after the money goes out, it’s gone. However, you can use the value of your net worth to stimulate your cash flow. This is where your assets come into play.