What You Need to Know About Liabilities

As part of OnlineAdvisor’s efforts to educate, inform and encourage business leaders, we present key financial terms and concepts.  Here are some key points you need to know about liabilities:

Liabilities are a part of every business.

Some people may have a tendency to see assets as “good” and liabilities as being “bad”.  It’s not that simple.  Liabilities do include debt.  They also include obligations to other entities and individuals.  If you are responsible for writing a check in the future for payroll taxes, the amount you owe is considered a liability.  It’s just simply that you owe money to someone or something – which is a part of doing business.

Debt is a liability – which can either be good or bad, depending on the situation.

For those people who are highly debt-adverse, the concept of being obligated to someone or something is frightening.  There is nothing wrong with avoiding debt that creates an unhealthy obligation by the company to someone or something else outside of the company.  Owing a lender, especially those who charge high interest rates, is not a good situation.  You’ll probably want to choose another option.  On the other hand, if your company is doing very well, but needs some additional money to grow, you may choose to loan the company the money it needs – which will result in a liability to the company.  Understanding that liabilities are for beneficial results is an important aspect to your business strategy.

Understanding your liabilities – and managing them wisely – is a key part of good strategy.

Again, liabilities are not always bad.  They can help create beneficial results.  For example, many suppliers provide the opportunity to pay a bill at no interest in 30 days.  Although the bill is a liability, even most conservative companies offer these beneficial opportunities to create more business.  If the customer receiving the benefit can sell the goods from the bill within the 30-day period at a healthy profit, they don’t have to pay the bill right away – but are able to sell the goods they received.  This approach can be a beneficial one, but also a dangerous one as well if you don’t pay on time.  Additionally, most suppliers won’t let you go past 30 days  – you can’t treat them like a bank.  You simply manage the situation and it works in your favor.

Liabilities can be trouble if you don’t manage them the right way.  However, it is always good to be building and maintaining plans on how you want to handle them.  Better yet, work with financial experts – they keep you out of trouble.

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