Finance 101:
LIABILITIES
Alice Ruhe
As an Insolvency Accountant, I see many business owners make mistakes,
often without the full understanding of what the ultimate result might be.
My aim is to help readers learn from some of the more common mistakes I
have seen, and assist in identifying red flags so they can discuss the same
with their accountants/lawyers/advisers so that they can make the most of
their business ventures.
Current vs Non-Current Liabilities
Firstly, it is important to understand the difference between current
and non-current liabilites in order to have a fully representitive balance
sheet. In short, a current liability is a liability that is due to be paid
within twelve months and a non-current liability will not be due for
payment in its entireity for more than one year.
The importance of proper classification is highlighted when
undertaking ratios and analysis (for example for solvency purposes). If
liabilities are incorrectly classified, it may lead to a company incorrectly
appearing either hopelessly insolvent or perfectly viable when, in fact
neither may be the case.
Trade Creditors
Generally when I ask a business owner about their liabilities, they will
provide me with a listing of their trade creditors. Although, often most of
an entity’s liabilities may be represented by trade creditors, it is important
to understand that the term “liability” represents much more than merely
these trade payables.
Business owners need to be aware of this when we discuss solvency, as we
talk about an entity being able to pay its debts as and when they fall due.
These “debts” do not only mean the trade creditors, but all of the entity’s
liabilities.
Whilst trade creditors are not the only liabilities, they are incredibly
important to understand. Business owners should be fully aware of the
trading terms that they enjoy with their trade creditors, which may vary
from creditor to creditor. This way business owners can more effectively
manage their cash flow.
Business owners should ensure that all invoices and associated payments
are entered into their accounting system promptly so that they can
consult their Aged Payables Listing on a weekly or monthly basis. This
way business operators can fully appreciate the quantum of outstanding
creditors, and be alerted to any solvency isues in the event that a number
of their creditors start creeeping into the 60 days column. If this does
occur, business owners should consult their accountant to discuss whether
the aging of creditors is as a result of short term cashflow issues or
inherent solvency issues and attempt to rectify the issue accordingly.