Liabilities are financial obligations or debts that a company owes to external parties.
Primary Implication
Are you “borrowing from Peter to pay Paul?” If yes, you have severe problems because your assets aren’t generating sufficient returns to meet your financial obligations represented by your liabilities.
One of the best things you do in the near term to stop this is to sell all underperforming assets. Do this to convert assets not working for you to cash so you can retire the debt you must pay others plus improve the focus of management on those assets that do make you money.
Overview
Liability is defined as a company’s legal and financial debts or obligations that arise during business operations. It is a claim against the assets of a business as a result of past or current third-party financing transactions or actions.
Using other people’s money to acquire needed assets has its advantages until you lose your ability to repay those you borrow from or generate a return for those who have invested in your business. Protect yourself from the problems associated with angry creditors and shareholders by making sure your assets work harder than the monies entrusted to you, or you will have problems.
Liabilities require a mandatory transfer of assets or provision of services at specified dates to satisfy business debt obligations. They are recorded on the right side of the balance sheet as follows:
Current Liabilities include trade debt (accounts payable), wages payable, accrued expenses, taxes, short-term loans, customer deposits, and unearned revenues.
Long-term Liabilities represent monies owed at a future period more than twelve months from the Balance Sheet date for loans accrued by a business to acquire an asset on credit.
The primary purpose of your Balance Sheet is to communicate the ownership split on the assets used in the business to generate sales at a profit. Protect your business and yourself by not allowing liabilities to be significantly higher than owners’ equity. Allow this to happen, and creditors will have a higher claim against the assets of the business than the owners do.
