Business Liabilities Every Owner Should Know About
Every business person, big or small, should know what their businesses’ liabilities are. Liability is any payment, whether obligation or loan, that your business owes. They are different from your business’ expenses and can be of various types. Every company has liabilities, and while it may sound as doom and gloom, it is part of the business.
If you have an accountant on board, you probably know all this already. If you don’t have one, you should consider hiring one through a staffing agency. The liabilities of a business measure its economic strength and financial viability. It is part of your balance sheet, along with assets and equity.
Liabilities – Good or Bad?
To understand whether liabilities are good for your business or bad, you have to know the types. Liabilities are usually of these three types:
As the name suggests, current liability means something that you owe right now or within the year. It can include any loan installments, salaries of your employees, or accounts payable.
You don’t have to pay long-term Business Liabilities right away, but you still owe them in the future. The payment can either be to a bank as mortgages or includes bonds.
Contingency plans are always your plan Bs. So, if something other than the usual happens and costs you money, it is a contingent liability. You might have to pay lawyer fees after a lawsuit or some other accidental payments. They are primarily results of an event in the future, and you have to account for them.
So, all these Business Liabilities can mean different things for your business. Sometimes, liability can be better for your business if it adds to its growth. Liabilities are not always bad as they can also mean business growth. If you have more current liability in the form of employee salaries, it may suggest expansion.
Difference between Liabilities and Assets
The two commodities might sound the same but are technically different. Your liabilities are not fixed expenses and are part of your balance sheet. Any expenses that go unpaid become liabilities. Here are some key points to understand better:
Expenses are essential aspects of the day-to-day costs of operating a business.
Liabilities can mean advancements in the industry, such as a loan taken out for a business car.
Expenses are part of the profit and loss statement, while liabilities are part of balance sheets.
Liabilities will not exist if you make all payments promptly and in cash. Using a credit card also creates a liability.
What are My Liabilities?
Businesses can have a lot of liabilities, and a good businessman knows them all. Considering the above-mentioned types of liabilities, here are some examples:
#1: Employee Wages
Employee wages mean the amount that your employees have earned but not received yet. The amount can differ as you hire or fire more people. The number of employees that retire or resign in a payment cycle can also make a difference. The payment cycle can be weekly, once every two weeks, or monthly depending upon your employment structure. While the amount may fluctuate, the liability will always be there as long as you have active employees on the payroll.
#2: Interest Payable
A lot of the time, businesses use credit to purchase raw materials or goods. The practice is widely common for bigger and smaller companies. The more items you are buying on credit, the bigger your liabilities will become. As there is always interest associated with credit payments, they will make up your current liabilities.
#3: Deferred Credits
If your business has received any advance payments, they can also become long-term liabilities. It can include a fee that you receive for service in the future. You have hence not earned the income yet, and it is a credit liability.
#4: Pensions and Employee Benefits
If an employee has retired and your business has to pay a pension or other old-age benefits, it is a liability. Moreover, this can also include any benefits the current employees can avail. For example, a provident fund, an advance on salary, or bonuses. Sometimes, for this type of liability, a business can be bound by law. Some countries make provident funds and old-age benefits necessary.
If your business gives warranties for services or goods, then they can be liabilities as well. For example, a car mechanic can give a warranty for all repairs. If a customer claims a warranty, the time, money, and other resources you use are a liability.
#6: Taxes Payable
Taxes are not a direct cause of running a business. Hence you have to categorize them as liabilities. Whether they are long-term or short-term depends upon the time you have to pay them. Government-enforced taxes have no way out, and you have to pay them sooner or later. Hence, taxes, whether property or sales are a liability.
#7: Loans and Mortgages
If your company has taken out a loan, the amount and markup are a liability. A bank might have given out the loan or even a friend. You may have a year to pay it back or longer. Moreover, you may have taken the loan out for expansion needs. Nothing changes the fact that it is a business liability.