TLDR:
Net worth is the total value of an individual’s or company’s assets minus their liabilities, representing their financial position at a given point in time.
Net Worth vs. Cash Flow
Net worth and cash flow measure different dimensions of financial health that can diverge significantly. A company or individual may have high net worth (valuable assets) but negative cash flow (insufficient income to meet obligations) — a scenario called ‘asset rich, cash poor.’ Conversely, high positive cash flow with low net worth may indicate a healthy business that hasn’t yet accumulated assets. For personal financial planning, entrepreneurs should track both metrics.
For startups, the distinction between net worth (total assets minus liabilities on the balance sheet) and enterprise value (what the market would pay for the whole business) is important. A startup’s balance sheet net worth may be minimal or even negative, while its enterprise value — based on expected future cash flows, growth, and competitive position — may be substantial. This is why traditional bank lending based on balance sheet net worth is ill-suited for high-growth startups.