Current Liabilities Defined
Current liabilities are those obligations that will mature and must be paid within 12 months. These are liabilities that can create a business’s insolvency if cash is inadequate. A satisfied set of current creditors is a healthy and important source of credit for short-term uses of cash (inventory and receivables). A dissatisfied set of current creditors can threaten the survival of the business. The best way to ensure creditors will be satisfied is to keep their obligations current.
Current Liabilities Detailed
- Accounts Payable (A/P): Accounts payable are obligations due to trade suppliers who have provided inventory, goods or services used in operating the business. Suppliers generally offer terms (just like you do for your customers), since the suppliers’ competition offers payment terms. Whenever possible, you should take advantage of payment terms because this will keep your costs down. If the business is paying its suppliers in a timely fashion, days payable will not exceed the terms of payment.
- Accrued Expenses: Accrued expenses are obligations owed, but not billed such as wages and payroll taxes, or obligations accruing. These expenses can also be paid over a period of time such as interest on a loan.
Accruals include wages, payroll taxes, interest payable and employee benefits accruals such as pension funds. As a labor-related category, it should vary in accordance with payroll policy. For example, if wages are paid weekly, the accrual category should seldom exceed one week’s payroll and payroll taxes.
- Notes Payable (N/P): Notes payable are obligations in the form of promissory notes with short-term maturity dates of less than 12 months. Often, they are payable upon demand. Other times they have specific maturity dates (30, 60, 90, 180, 270, 360 days maturities are typical). Notes payable include only the principal amount of the debt. Any interest owed is listed under accruals.
The proceeds of notes payable should be used to finance current assets (inventory and receivables). The use of funds must be short-term so that the asset matures into cash prior to the obligation’s maturation. Proper matching would indicate borrowing for seasonal swings in sales, which cause shifts in inventory and receivables, or to repay accounts payable when attractive discount terms are offered for early payment.
If you have any questions or would like to have a conversation about your business goals please feel free to give me a call. I routinely consult with small business owners on how to improve their profitability and revenue and would be glad to have a conversation at your convenience.
Lee Thurburn – 214-772-6854