Long Term Liabilities: Explained

What is it, how to calculate it, formula, why it's important

Hey there, fellow business enthusiasts! As the CFO of my company, I know how intimidating finance jargon can be. I’m glad you’re here, because today, I’m going to explain Long-Term Liabilities in a way that is easy to understand.

What are Long-Term Liabilities?

Long-Term Liabilities are debts that a company owes, which are due in over a year. These types of liabilities represent money that a business has borrowed and will have to payback in the future, usually in one year or more.

There are many types of long-term liabilities. Some of the most common ones include:

  • Bonds Payable
  • Leases Payable
  • Pension Obligations
  • Deferred Income Taxes
  • Mortgages Payable

Now, don’t get intimidated by the long list. It’s not as scary as it sounds.

Why are Long-Term Liabilities Important?

As a business owner, it is important to keep track of long-term liabilities because it can affect a company’s creditworthiness. A company with a lot of long-term debt can be seen as risky, as it has less money available to invest in its own growth and development.

On the other hand, if your company has no long-term liabilities, it may signal to potential investors that your company may not be investing in its growth or expansion.

When investors are considering investing in a company, it is important to show a good mix of short-term and long-term liabilities. Short-term liabilities can be demonstrated by looking at the accounts payable of a company, which represents money the company will owe in the next year.

How Do You Calculate Long Term Liabilities?

Calculating your long-term liabilities is pretty simple. You just need to take the amount of outstanding debt that is due in over a year and record it under the “long-term liabilities” subsection of your balance sheet.

If you have trouble calculating this yourself, don’t worry. There are many accounting software programs available that can help you with this. I personally recommend Quickbooks or Xero.

Why Should You Care About Long Term Liabilities?

As a business owner, tracking your long-term liabilities is vital to ensuring the financial stability of your business.

Having high levels of long-term liabilities can lead to several issues such as:

  • Difficulty obtaining credit
  • Increased interest rates
  • Reduced cash flow
  • Negative perceptions from investors

On the other hand, having no long-term liabilities can lead to the following:

  • Lower creditworthiness
  • Less financial flexibility
  • Lower confidence from investors

As a CFO, I always strive to keep a good mix of short-term and long-term liabilities to ensure we have the flexibility and resources to reinvest in our company.

Wrapping Up

So, there you have it, folks! Long-term liabilities may seem intimidating, but they’re nothing to be afraid of. By keeping track of these liabilities, you’ll be able to make informed business decisions and keep your company on the path to success.

If you have any questions or thoughts about Long-Term Liabilities, don’t hesitate to reach out to me. As always, thank you for reading and happy business-ing!

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