Most businesses like software development companies strive to do their best to succeed in their chosen enterprises that they are passionate about. They make it a point to select a business closest to what they enjoy most doing. In case they opt to get involved in software development, the secret of a successful enterprise lies in hiring the perfect-fit dedicated team who has the capacity to support several initiatives such as app development, team planning, building infrastructure, and supporting and enhancing suitable web apps.
Importance of owner equity
In most cases, entrepreneurs initiate their businesses to earn income or make an investment with the goal of achieving profit through selling products and services. To fully understand better the concepts behind managing a business, one should have a background on the owner’s equity and what this means in establishing one’s business and managing personal finance.
For any sole proprietor or if you have a business partner in a software development business, you and your partners own everything. You have no dividends to think about for your shareholders. As an owner or co-owner, you take full business ownership.
However, you are not exempted to several liabilities that must be managed accordingly. Unable to take care of your liabilities can provide you a poor image of your company’s value. You should be familiar with the owner’s equity to identify how much ownership you can have in your firm.
Basic concepts about owner equity
The owner equity is part of the asset’s full value, which is owned by the firm. This can be either be claimed by partners who own the company or its shareholders. To calculate the owner’s equity is made easy. Based on the total value of the assets, one can deduct the liabilities. Then the owner equity is attained. To make things simpler, the liabilities cited previously are the amount that belongs to the investors or creditors that is part of the company’s asset. Regarding the owner’s equity vs. shareholder’s equity, in the former, the business is tightly held, while in the latter, it is widely held.
Owner equity defined
Owner equity, also known as net worth, equity or net asset, is the amount of ownership for your business after eliminating your assets’ liabilities. This identifies the available capital of your business for activities like making an investment.
Liabilities refer to the business’ debts like accounts payables, loans, and mortgages. Assets relate to anything your business possesses like cash, company vehicles, and intellectual property.
Considering liabilities must be prioritized, they should be paid at once before the owner’s equity. Subtracting your liabilities from assets provides you an idea of what is left that you own after paying all your debts.
Managing your finances
Determining your owner’s equity is vital as it assists in your financial evaluation. You may opt to compare your owner’s equity from one specific period to another to identify whether you have gained or lost value. This is very useful when making decisions whether expanding your business is viable. Also, show to your investors and lenders the owner’s equity if added financing is needed.
Remember that owner’s equity reflects the book value of your enterprise and not the market value. Book value is the paid amount for an asset when you make a purchase. Market value is the asset’s price when deciding to sell it. As assets can either appreciate or depreciate for a period, market value is different from book value. The owner’s equity does not provide a fair representation of your business’ market value.