This is dedicated to those who lost great business opportunities because they didn’t realise their huge exposure to liabilities.
What is a liability? It is anything that makes it more difficult for you to stay afloat in business.
It is anything that eats up whatever profit you are making in your business.
Liabilities are debts owed by one business to another business or to individuals.
They are the opposites or assets.
They make it difficult for investors to trust you. They make it difficult for you to even trust yourself.
In financial statements, they absorb whatever profits you should boast of.
So whether you’re a service provider like a comedian, performing artiste, travel guide and translator, or you’re selling products like a wig manufacturer, clothes designer, digital marketer, automobile dealer and horticulturist, if you have more liabilities than you have assets in your business, the chances of growth and expansion for that business are very slim.
Before we go into how to bring down liabilities, let’s stop by and examine activities that bring liabilities in the first place and examples of liabilities.
Not having a basic knowledge of your business’ liquidity can lead to a build-up of liabilities.
This is because if you know that your business is running low on cash, meanwhile you have overheads to pay, you will be more mindful of wasteful spending. You will be less likely to take risks.
Furthermore, not having goals for your business can also lead to heavy liabilities in a business. If you had goals for your business, your business action plans and to-do lists will guide your actions. You will be less exposed to unnecessary liabilities.
So the general lack of structure in your business is likely to lead you to a high liability exposure.
Now not all liabilities are bad because every going concern has some liability that balances its books.
A business’ responsibilities are also its liabilities like you will see soon
Now what are examples of liabilities,
Let’s mention a few.
1 Direct debts – either of bank loans individual loans investors funds and the like.
- Unpaid taxes for the officers of the business and the business itself. For example, the business should deduct pay as you earn tax from its employees and remit to the state government. If that is not done, it becomes liable for those taxes.
There are also other taxes like property taxes, value-added tax and the like.
- Unpaid overheads. Salaries are part of a business’s liabilities. The same goes for rent, utilities and consumables. They are recurring expenses that the business must always pay.
- Monies owed suppliers, vendors, clients and customers.
- Licences and permits for professionals, industries and procedures.
The list goes on.
From the above, it is clear that some liabilities are needed to keep the business as a going concern. On the other hand, some will compromise the life of the business if not well-curtailed.
So how does a business reduce its exposure to such negative liability?
Observe these 4 principles.
- Help yourself see your finances at a glance by using invoicing software. These can summarise the financial status of your business for you on 1 page so that you know when to make critical changes.
- Have a business plan, which you will use to determine long and short-term goals of the business. These will direct where and how the business will spend money.
Make sure it is in a place where it can be seen easily and team members can make reference to relevant portions often.
- Don’t lump too many capital projects together at the same time. Space then out to give the business a breather. An accountant won’t be a bad idea if the business can afford one.
- Stop trying to keep up with the Joneses. No 2 businesses are the same. Before you copy someone’s business hook, line and sinker, make sure the other business is exactly the same as yours. You will soon discover that no business is like yours.
Since you are not the same, it is also likely that you are at different places in your growth circle. So locate yourself in that cycle and adapt whatever you want to copy accordingly.
On the whole, it is impossible to avoid liabilities in any going concern. The trouble arises when the liabilities begin to outweigh the assets.