At any time in its existence an enterprise will have liabilities. These consist of money that is owed to other enterprises such as the owners, suppliers, banks, to repay loans or reduce overdrafts and the taxman

The liquidity of an enterprise is judged on the relationship between the assets and the liabilities. It is obvious when talking about it that your assets must be greater than your liabilities if there is to be any potential for a future in the enterprise. To have the liabilities greater than the assets means that the enterprise is insolvent and it is an offence to trade under such conditions

Many Company's do, however, continue to trade on the assumption that it can be turned around and by doing so are likely to build up more liabilities and unless they are able to grow their assets at a greater rate they will certainly go under, taking others with them if not their money

Keep a strict eye on your Balance Sheet and take action when you start to see the picture changing towards a negative nett assets, that is the difference between the assets and the liabilities. Although there will be long term liabilities on the Balance Sheet they should not be ignored in the equation and take note that some of your assets cannot be turned back into cash easily, certainly not quickly and banks have a habit of calling in overdrafts and loans at short notice

Treat your liabilities as firm commitments to pay and base your cash flow forecast on making payments when they are due. This is a major management requirement and should be dealt with as early as possible - if you know you cannot pay within the time necessary then call the creditor (to whom you owe the money) and negotiate a delay or an installment plan as quickly as possible. This will give your creditor some reasonable assurance that you will be making the payment(s), you can sleep better with the stress reduced by not having to deal with 'final demands' and possibly 'court orders'. But be sure that you will be able to pay when you promise - otherwise you will get no more help

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Last Update 08-Jan-2012

Date first published 07-Nov-2005