The answer to this questions might seem a little abstract. Usually, when we think about wealth, things like money, properties and other sort of assets come to our minds.

However, the definition of wealth is much broader than that. Some books refer to it as the time that you would be able to live in case you don’t have any source of income, that is, if a person with 1,000.00 euro can live for two months, and another one with 1,500.00 euro can live only for one month and a half, the one with 1,000.00 euro would be wealthier than the former. Applied to business, wealth would be the time that a company can live without any revenue at all, but a business owner would probably need more than that.

Let’s look at it from the financial perspective, where wealth can be defined as the difference between assets and liabilities. We shouldn’t confuse them, though, with the concepts described in a previous article. For this, the criteria to define assets and liabilities is defined in accounting regulations (which differs from one country to another). Keep in mind that this doesn’t apply only to available cash. Properties or loans are taken into account. For example, let’s imagine a simple case of a company with the following balance sheet:

Assets

Property: 500,000

Customers: 20,000

Cash: 5,000

Total assets: 525,000

Liabilities

Loans: 250,000

Suppliers: 15,000

Total liabilities: 265,000

Wealth is the difference, which is 260,000.

Despite the simplicity of this example, it can be seen that the composition of assets and liabilities include rights (to use or receive some cash in the future) and obligations (to pay certain amounts of money to other parties). In this sense, more available cash doesn’t necessarily mean more wealth (but more capacity to face immediate debts). As a business owner, it is crucial to understand what your both assets and liabilities are and the relationship that these figures have, to detect any risk that might compromise your hard-earned business.

Note that a balance sheet is the result of accounting regulations, to provide with information of the true and fair view of the financial position, which is of interest to the government, lenders, shareholders and other users such as the public in general, not only the owners.

Owning properties are usually perceived as assets because they can help bring future cash inflows to the business, but they generate additional costs such as a taxes or maintenance. Before acquiring it, it would wise to assess whether the investment will help increase your wealth, as described in the article assets.