How to Understand and Manage Business Liabilities
Business liabilities are defined as outstanding payable items that your business is responsible for. A common, oft-quoted axiom is “you have to spend money to make money” and liabilities are the manifestation of that proverb.
It’s not a bad thing to have outstanding business liabilities; what’s much more important is ensuring you have the cash flow to cover them so that you can cover your debts as agreed.
Strictly speaking, a liability is an outstanding item purchased for a business that is not settled for in full in cash immediately upon receipt. Business liabilities can include, but not limited to:
* Staff wages and salary;
* Sales and payroll taxes;
* Revenue for services rendered that has yet to be received;
* Loans, mortgages, and other payments;
* Bills for services rendered for you by other companies; and
* Accrued expenses.
Liabilities themselves also fall into three categories:
* Current liabilities. Paid back in a short period of time (usually within a year).
* Long-term liabilities. These are paid back in a period of time spanning years.
* Contingent liabilities. These are pending items that may or may not need to be paid back, and hinge on some as of yet unknown event, such as the outcome of a lawsuit.
Business management requires a lot of considerations. There is no one-size-fits-all approach to determine whether a liability is a bad idea to take on. Some common metrics used are your current levels of outstanding debt, your incoming cash flow, as well as your available liquidity.
For example, you may correctly reason that a large investment may significantly grow your enterprise over five years. However, if it proves too expensive in the short term and you fail to meet your liabilities over the next six months, then it doesn’t matter how profitable it would have been.
Think of a business as a well-maintained car; you can be extremely diligent about changing the oil, brakes, and fluids. However, if you can’t afford to keep your tires replaced and they wear out, you’re not going to get to where you want to go.
If you have any questions about managing your liabilities, please consider setting up a consultation with our team.
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