Question

What are short-term liabilities and why are they so important to manage? Please use one example to illustrate your point.

Answer 1

Short-Term Liabilities, also known as Short-Term Debts.

Any financial obligation that is either due within a 12-month period or due within the current fiscal year is called as Short-term liabilities

The value of the short-term debt account is very important when determining a company's performance. If the account is larger than the company's cash and cash equivalents, this suggests that the company may be in poor financial health and does not have enough cash to pay off its short-term debt

Types of Short-Term Debt/ Liabilities:-

Short-Term Bank Loans or Bank Plug :-

These types of loans arise on a business' balance sheet when the company needs quick financing in order to fund working capital needs It's also known as a "bank plug," because a short-term loan is often used to fill a gap between longer financing options.

Company's Accounts Payable:-

This liabilities account is used to track all outstanding payments due to outside vendors and stakeholders.

For Instance:-

If a company purchases a piece of machinery for $25,000 on short-term credit, to be paid within 30 days, the $25,000 is categorized as an account payable.

Company's Fixed Payable:-   

Sometimes, depending on the way in which paid by their employers also can be a short-term liabilities.

Examples:-   Salaries to Employees, Building Rents, maintenance Bills( like Electricity Bill, Telephone Bills )

Lease payments:-

Lease payments can also sometimes be short-term liabilities. Most leases are considered long-term liabilities, but there are sometimes leases that are expected to be paid within one year.

For Instance:-

If a company signs a six-month lease on an office space, it would be considered short-term debt.

Taxes:-

Sometimes taxes can categorized as short-term liabilities. If a company owes quarterly taxes that have yet to be paid, it could be considered a short-term liability.