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Net assets are usually defined as the total worth of all existing assets minus any liabilities currently held by the company or individual. Sometimes referred to as net financial assets, the term is not widely used in the business community, although it is used extensively among charities and non-profit agencies. In function, it more or less equates with owners equity or net worth as used in business settings.
There are a number of subcategories of net assets that may be employed, depending on the type of assets that are under consideration. For example, net income assets would refer to income that is retained after all liabilities connected with generating that income are settled. Net capital assets would encompass the value of both income and other assets after deducting expenses or liabilities directly connected with the current value of those capital assets. Net investment assets would refer to the amount of return earned by the investor by the increase in the value of each share of stock less the original purchase price.
In all its forms, the basic definition centers around what remains after all relevant liabilities are subtracted from the gross value of those assets. Whether in the management of a household, a corporation, or a non-profit agency, the expectation is that the operation will produce a positive number. In the event that the total of relevant liabilities exceeds the total value of assets on hand, the entity is understood to be operating at a loss. Should this occur, immediate action to correct the imbalance should be taken.
In order to track the current rate of net assets effectively, many businesses calculate the figure on a monthly basis, once the current billing month is closed out. Some organizations choose to review their status on a quarterly or semiannual basis, depending on the nature of the organization and any bylaws that may govern the management of financial holdings. Many financial experts recommend that the status of these assets be reviewed at least once every three months, even if there is no legal or contractual obligation to do so.
When a company has a negative net worth, its operators should look at the current status of each asset involved as well as the liabilities currently held by the individual or other entity. Often, it may be practical to sell off one asset in order to retire all or at least enough of the overall liability to result in a positive net asset situation once again. There are also other options, such as renegotiating current debt to lower the rate of interest that applies or diverting more generated revenue to retire the debt at a faster pace. However it's done, making sure that the company is operating at a profit is essential to the ongoing fiscal well-being of any company, organization or individual.
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