“Current liabilities are essentially the money you owe [your suppliers] or are due to pay [your suppliers],” says Chris Baker, Founder of Serious Tissues, which provides eco-friendly toilet roll, both wholesale and to consumers.
“We get our toilet roll by the truckload which is a big expense, and we also need considerable space in a warehouse to store the product," says Baker. "An increasing amount of our orders are now coming from corporates who have payment terms of between 60 to 90 days. If we’re buying a truckload of toilet rolls and not getting paid for 90 days, this can result in a pretty big hole in our cash flow.”
Understanding current liabilities
Current liabilities are important because they show a company's immediate financial obligations and indicate its overall liquidity, and are therefore an important element of a business’s cash flow. Understanding the link between current liabilities and cash flow is crucial for managing liquidity and ensuring a business’ smooth operation.
Businesses should monitor liabilities carefully and ensure they have sufficient money to meet these obligations or they could risk damaging existing and potential supplier relationships and putting a strain on their cash flow.
“Be proactive and ensure your working capital cycle is accurate so any pinch points can be identified as early as possible and dealt with,” says Holly Gibson, Partner in the Business team at chartered accountants Price Bailey.
To stay on top of its current liabilities, Serious Tissues uses a cash flow forecasting tool, and the company has a regular, weekly cash flow meeting.
“We are also proactive with our planning," says Baker. "For instance, for our consumer orders, we know roughly the number of truckloads we have to buy over a set number of days. This is reasonably consistent, while our business-to-business orders are less so.”
If some current liabilities are suddenly larger or higher than expected, this could impact a business’s day-to-day operations. This has been the case for Serious Tissues, which says that over the last year, the surge in the cost of utilities resulted in smaller margins and higher delivery costs.
“There are plenty of macro trends you can get exposed to so it’s vital to understand your current liabilities so you can better manage the business’s financial stability,” says Baker.
Five examples of current liabilities
1. Accounts payable / trade creditors
These are amounts owed to suppliers for goods and services in the form of unpaid invoices.
“If trade creditors are not paid within the required payment window, then they could refuse to provide any further goods or services until such time the liability is paid,” says Gibson. “This could have a direct impact on the business being able to operate and complete work.”
One way for business owners to manage current liabilities to their advantage is by agreeing payment terms with suppliers that meet their business’ needs and working capital cycle.
2. Tax liabilities
These are monies owed to HMRC for VAT, PAYE and Corporation Tax. The non-payment of tax liabilities could have a direct impact on business operations. Not only will these still need to be settled, they can also accrue interest and potentially penalties, exacerbating the issue and making the liability even larger.
“Be upfront with organisations such as HMRC and set up payment plans where possible as opposed to leaving [tax liabilities] and letting them build up,” advises Gibson. “They will be less sympathetic if you don’t talk to them.”
3. Short term borrowings / credit facilities
These include bank loans, bank overdrafts and/ or the balance on cards, be they credit or charge cards, which may help offer businesses the flexibility to manage their cash flow.
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4. Accruals
An accrual is money that a business has earned, or will need to spend, but money hasn’t yet changed hands. In the context of current liabilities, accruals will refer to expenses that have not yet been paid or invoiced, for example utility bills or rent.
5. Deferred income
Monies received by the business for a product or service that has not yet been provided or delivered to the customer are known as deferred income.
Current liabilities on the balance sheet example
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A balance sheet will feature assets, liabilities, and the business owner's equity. Current liabilities on the balance sheet appear after the assets section and before non-current liabilities, and are often shown as one figure with more detail in a separate note to the accounts. The order in which the current liabilities are listed can vary as can their descriptive headings.
“It is important to remember the liabilities on the balance sheet will only be a snapshot at that particular date,” says Gibson.
Current liabilities vs. current assets
Current assets are assets expected to be used, consumed or sold within 12 months, for example cash and stock of goods.
Current liabilities and current assets are linked as the difference between the two is a business’ working capital - the amount available to pay current liabilities. Businesses need some assets to be readily convertible to cash (current assets) so they can pay their short-term debts (current liabilities.)
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