Managing your own small business involves keeping an eye on many moving parts. Even a minor oversight can have severe implications for you and your employees. In light of this fact, you must be keenly aware of your company’s liabilities.
Every business, regardless of size, has liabilities. In short, the term “liability” refers to any financial obligation that your company is responsible for. Liabilities can be grouped into one of three broad categories, which are as follows:
1. Current liabilities
2. Long-term liabilities
3. Contingent liabilities
A current liability refers to a debt that you must repair within 12 months. This may include short-term loans, employee salaries, and accounts payable, but more on that below.
Long-term liabilities are debts that you will have to repay eventually, but the final balance is not due any time soon. With that being said, you may have to make monthly payments on long-term liabilities. A few examples of long-term liabilities include business loans or the mortgage on your facility.
The third type of liability is known as a “contingent liability.” Think of these as cause-and-effect scenarios. You will not owe money on these liabilities unless a specific chain of events happens. For instance, if your company is the subject of outstanding legal action, and you are found at fault, you will have to pay fines as determined by the court.
Now that we have outlined what liabilities are, let’s look at three of the most commonly encountered business liabilities.
1. Wages Payable
As the name implies, “wages payable” refers to the money you owe your staff. Wages payable is an ongoing, recurring liability that will never be eliminated. In fact, your wages payable liability will only grow larger as you expand the scope of your business.
2. Accounts Payable
Accounts payable is the money that your organization owes to its vendors or suppliers. This is an important liability that you should always carefully monitor and track. Overlooking an outstanding accounts payable balance can leave your company in the red and result in disruptions to normal business operations.
Your accounts payable liabilities may be owed to service providers or vendors that supply you with physical materials. For instance, a medical clinic like ThriveMD may have active accounts payable liabilities with vendors, such as personal protective equipment suppliers and managed service providers.
3. Outstanding Loans
Unlike the two liabilities outlined above, business loans are a liability that you can eventually eliminate. Typically, outstanding loans are considered current liabilities because the repayment terms are very short. However, larger business loans may have more extended repayment periods, which would make them a long-term liability. These three liabilities are just a few of the many financial obligations you will take on as a small business owner. The key to thriving as an entrepreneur is to strike a perfect balance between the liabilities you incur and your revenue. If you do that, your business will be in a great position to succeed.