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.