To ensure your business keeps running smoothly and doesn't get pinched for cash, you should have a handle on your current liabilities. These are the bills that have to be paid within the next year, although many of them will come due in a shorter time frame. Knowing your average current liabilities is essential to cash-flow planning, and calculating your average isn't difficult.
For many businesses, accounts payable makes up a large portion of current liabilities. "A/P" represents your own outstanding bills to suppliers and vendors, such as for inventory or services. Another key category, accrued liabilities, includes costs you've incurred but not yet paid in cash, such as wages earned by employees, interest that has accrued on borrowed money and accrued rent or utility costs. Short-term loans, including credit card debt, are typically current liabilities. If your business carries long-term debt, such as a mortgage or business loan, the portion that will come due in the next year also counts as a current liability.
Beginning and End
The simplest way to calculate your average current liabilities for a particular period is with the beginning-and-end method. Get the total value of current liabilities as recorded on the balance sheet for the beginning of the period. Then get the total value of current liabilities from the balance sheet at the end of the period. Add the two figures together and divide by 2. The result is your average current liabilities.
The beginning-and-end method is common in financial accounting, but depending on your specific business cycle, it might not be adequate. For example, say you operate an ice cream shop. Your store may stay open all year, but you probably do the bulk of your business in warmer months. As a result, you are ordering more inventory, paying more in wages and incurring more of other operating costs from, say, May through September. If you were to use the beginning-and-end method, your average current liabilities for the year would be based on totals from January 1 and December 31 -- outside your peak season. It would significantly understate your actual average liabilities.
To get a more accurate picture of average current liabilities, add more data to the equation. Rather than just add together the figures from the beginning and end of the year, you could use quarterly figures, such as from January 1, April 1, July 1 and October 1. Add them all together, then divide by 4. Ore you could add together the monthly figures and divide by 12, or use weekly figures and divide by 52. The more figures you use, the more your cyclical ups and downs will be reflected in the result, and the more clear the picture will be of your typical obligations.
- Financial Accounting for MBAs, Fourth Edition; Peter Easton, et al
- Principles of Accounting: Current Liabilities
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