Liabilities

What is Liabilities? Is it really that bad to have one??

Having the root word liable, liabilities simply means “bound or obliged”. In business or accounting terms, having liabilities is having payables that are required to be paid. Many people think that having liabilities are somehow bad. But that doesn’t mean necessarily true. In fact, some liability is needed in order to have a successful business. But before we continue digging up in the good benefit of liabilities in business, let’s check the people’s dilemma in so-called “bad liabilities”. Let’s see it from the story of Juan. Juan is a typical employee earning his salary every end of the month. He aimed to have an upgraded lifestyle so he got himself a mortgaged house and an installment car loan. His working hours were fine when he didn’t have these 2 loans but when he had it, he was obliged to do overtime. These 2 loans are his liabilities because both are not giving him a passive income. Now it is becoming bad as these liabilities are somehow not making his life lighter but giving him more stress. He is obliged to work more hours and on top of that, since he aims to have an upgraded lifestyle, he prefers to take a taxi or rental car now instead of public transport when his car is in service and drinking coffee in Starbucks while before cheap 3 in 1 coffee would be satisfying already and so many buying gadgets or branded stuff that he used to not have. In that way, his liabilities are piling up and never ends.

We can see that many individuals thought they’re doing themselves a favor when having these bad liabilities. Juan is not a bad person at all, he just needs to be more careful about deciding where to put his money in order to have financial freedom and a real upgraded and stress-free lifestyle.

Now let’s have a look at having liabilities that are needed in order to have a successful business. The examples of those are the financial ones needed in operations. In accounting, it is written on these terms; 

-Accounts payable (raw materials supplier, traveling, equipment, leasing, licensing)

-Interest payable (represents the amount of interest currently owed to lenders)

-Income taxes payable (taxes due to government)

-Notes payable (loans normally in banks with promissory notes)

-Wages/Salaries payable (employees salaries)

As you notice, if a business won’t have these kinds of liabilities, it won’t run and won’t achieve the success of the business. We can simply compare these liabilities into gasoline or petrol of a car. A car won’t start or run without gasoline!

In short, defining liabilities shouldn’t scare people. It’s often has a bad connotation because of its nature of spending money outward. It is only our choice if we will be like Juan or convert our income into having a business with liabilities that will help us to be successful. In order to point out if it is a good liability, it must help our business to operate and grow. But also remember, too much liability can hurt a small business financially. Owners should track their debt-to-equity ratio and debt-to-asset ratios. Simply put, a business should have enough assets (items of financial value) to pay off their debt (liabilities).