For the most part, managing finances comes down to balancing your liabilities and assets. Liabilities represent all the debts you owe to suppliers, investors, banks, and other organizations, while assets are all the company resources, like buildings, equipment, and stocks. Understanding the terms is vital for running a successful, sustainable business.
In this article, we’ll focus on the most essential liabilities for your business and how they affect your day-to-day operations.
1. Invoices
Large companies receive hundreds of invoices daily. These invoices are bills for services and goods that other companies provide. You can use them when buying and selling machine parts, raw materials, products, and other purposes.
Besides the fact businesses use invoices to execute transactions, they’re also vital for bookkeeping and tax purposes. They are digital traces of your economic activity, allowing you to streamline daily operations. In fact, upon exchanging an invoice, the transaction gains the status of a legal agreement.
It’s worth mentioning that, unlike bills, invoices carry due dates. While 30-day invoices are the most common, they can also have 7-day, 21-day, or longer due dates. It’s worth mentioning that, in practice, you can miss your due date without repercussions, although it’s considered disrespectful behavior toward your partners.
2. Payrolls
Payroll liabilities are one of the biggest tickets for most companies. This is especially true within the service industry and for companies with facilities and offices in Western countries. Besides wages, the liability category also includes employer taxes, withholdings, and software expenses.
It’s worth mentioning that many people confuse payroll liabilities and payroll expenses. Unlike the liabilities, which represent unpaid debt toward your workforce, the payroll expenses are a line item that shows the obligations we’ve settled in the previous period. In other words, we use differentiation to figure out what we owe and what we’ve paid.
Due to the sheer size of payrolls, companies often look for ways to reduce this expenditure. The simplest one is outsourcing labor to other countries. In the last few years, businesses have focused more on freelancers as it allows them to mitigate some of the taxes. Another way to reduce these costs is by optimizing health and dental plans.
3. Loans
Loans are one of the more common liabilities that allow companies to purchase machinery, software, inventory, or simply have cash for day-to-day operations. Every loan has a specific payment window, during which you’re responsible for settling the principal and the interest. How much you pay will be affected by the current interest rates as well as the risks involved.
According to general economic theory, loans are only feasible for growth. While some brands use it for debt consolidation, this isn’t the ideal way to spend money. Many public agencies provide particular loans for small businesses and farms, which is something you should consider before reaching out to a bank.
4. Mortgages
Mortgages are liabilities we use to buy property assets, and, as such, we consider them as a type of loan. By borrowing money from a bank or some other institution, we can purchase land, offices, and other buildings. After signing a contract, a lender can use this property as collateral in case you don’t pay your mortgages.
That being said, a mortgage and its underlying asset are closely connected. Given the importance of having a business property, managing and paying off mortgages is one of the biggest concerns for companies. The statement is especially true for manufacturers who can’t quickly relocate or start renting.
Furthermore, the way you manage a property can also affect other accounting processes. For example, it might have a direct impact on your equipment but also on utility and insurance expenses.
Keep in mind that even if you had insurance, there’s a chance you might have to resort to property damage litigation. The issues commonly start when an insurance company denies valid claims but might also occur due to payment delays, cancelation threats, and undervalued claims. In these cases, you have to find an excellent legal representative to present your case.
5. Bonds
Bonds are a type of debt financial asset. Unlike stocks, they don’t pass control over the company, nor do they allow you to participate in profits. Instead, companies issue bonds to investors as a way of funding current operations. At a set date in the future, the business has to pay back the money plus interest.
Bonds are a good way of circumventing traditional loans. Most importantly, using these financial assets allows you to gather money at much lower rates. Then again, there are situations where companies are forced to introduce high-interest rates just so they can attract enough investors to their financial assets.
It’s also worth noting that, unlike regular loans, using bonds doesn’t impose as many restrictions. For example, a bank might force you to pay off previous obligations before getting a new loan. Alternatively, they might increase your rates based on your current financial state.
Last thoughts
Managing your debt and other obligations the right way is crucial for any brand. Ideally, you should try to limit associated costs as much as possible to gain additional value from every dollar borrowed. As long as you have a good understanding of liabilities, it won’t be a problem to do just that.