Net worth is defined as the value of our assets minus the liabilities we owe. For example, if a person has $800,000 in assets (including their home, car, investments, and savings) and $500,000 in liabilities (including their mortgage, car loan, and credit card balances), their net worth would be $300,000 ($800,000 – $500,000).
A positive net worth may indicate an abundance of financial resources currently but it does not tell us if a person has enough cash on hand to meet existing expenses or to be able to invest in new opportunities. Conversely, a negative net worth may indicate financial difficulties, but a positive cash flow can cover living expenses and allows for more investment opportunities for future growth.
In other words, cash flow can be a more accurate reflection of a person’s ongoing financial health and how close he is to financial freedom because it reflects his ability to generate and manage cash in the present and future, rather than simply measuring their accumulated wealth at a single point in time. In the same vein, companies with high cash flow are more attractive to investors than those that simply have high net worth.