If you expect to master your cash flow and achieve harmony in your business finances, you need to think about more than making money. You also need to take stock of your various financial obligations. Some of these, like paying your vendors and covering the rent on your physical premises, are very short-term. But what about your longer-term liabilities?
Here, we’ll look closely at long-term liability, what it means for businesses and why it’s such an important part of your business finances.
What is a long-term liability?
A long-term liability (also known as a non-current liability) is an obligation that is outstanding but not due within the current operating cycle. For most businesses, this is 12 months. These long-term debts are likely to have lasting implications for your business’ finances. And while you may have more pressing liabilities to contend with in the here and now, like paying your vendors on time so you can maintain a good relationship with them, businesses ignore their long-term liabilities at their peril.
Just because a long-term liability is not due within the current operating cycle, that doesn’t mean you are not obliged to make contributions to your long-term liabilities (i.e. loan repayments) within the year. You can’t afford to miss them out of your financial modelling and cash flow projections.
Examples of long-term liabilities
There are lots of different long-term liabilities that businesses like yours may need to factor into their cash flow projections. These may include:
From startup loans to get you off the ground to bridging loans to keep your cash flow ticking over, businesses commonly use loans to facilitate their operations. Business loan agreements may take years to settle and can have lasting implications for your cash flow and margins.
Deferred tax payments
Many businesses and sole traders have taken advantage of deferred tax payments offered by HMRC to help them to better manage their cash flow in the wake of reduced revenues caused by COVID-19. If your last financial year’s liability is spread over longer than 12 months your deferred tax payments are classed as long-term liabilities.
Leases and hire purchases
Paying upfront for your equipment can be damaging to your cash flow. Many businesses choose options like leasing, financing and hire purchase on plant, vehicles and other hardware. This allows them to get the latest and greatest equipment on which they can build efficient operations, without huge upfront costs.
Bonds and notes
Bonds are shares in a company’s debt, although they can also be issued by local and national governments. The issuer promises to pay interest every six months and pay the principal or maturity at a specified future date. Notes payable are functionally the same as bonds, although they have a shorter maturity period.
Although your workforce may be far from retirement age as an employer you are legally obliged to offer a pension to all of your employees. Your future pension liabilities should also be factored into your long-term liabilities.
Why are long-term liabilities important?
When you run a business, it’s extremely tempting to be reactive and focus on the here and now. Especially on days when you feel that it’s all you can do to keep your head above water. But if you don’t make time to address your business finances, they can quickly spiral out of control.
Your long-term liabilities are an important part of your bottom line. If you don’t try to address them now, they could have a damaging effect on your margins in the future.
We can help
If you’re interested in discovering more about long-term liabilities, managing your financial obligations, or any aspect of your small business finances then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.