This article is part of a larger series on Business Financing.
A current liability is any financial obligation that has an amount due within the next 12 months. These can be found on your company’s balance sheet and can include things like loan payments, payroll expenses, and accounts payable. It’s an important figure to know because it’ll help ensure you have enough assets to satisfy your short-term liabilities. To calculate your current liabilities, you can use our calculator:
Current Liabilities Formula
Here’s the formula for how to calculate your current liabilities, along with a description of each category. The items in this formula can be found on your company’s balance sheet.
This is the total amount of loan payments you’re obligated to make. For example, when you get a small business loan, you’ll likely be required to sign a promissory note, a document that outlines the terms of repayment. These terms typically include the loan amount, loan term, interest rate, and the amount and frequency of periodic payments. Any payments that are due within 12 months are considered a current liability.
Accounts payable (A/P) refers to the amount that’s owed to suppliers and other vendors for services and products they’ve provided to your business. These businesses typically will issue an invoice to your company, which must then be paid within 30 to 60 days.
Short-term loans with any amounts due within the next 12 months will be considered a current liability. This will include any amounts for principal, interest, or any other loan fees. Some examples of a short-term loan include a small business line of credit, business credit cards, and personal loans obtained for business purposes.
These are expenses that your business has incurred but not yet paid. Some common examples can include payroll expenses and wages for employees, utility bills, rent payments, and customer warranty repairs.
Unearned revenue is cash received from a customer for goods or services that haven’t yet been provided but will be fulfilled within 12 months. Common examples include insurance payments made in advance, prepaid rent, annual subscriptions for computer software, or gift cards.
Current Portion of Long-term Debts
If you have taken out a long-term loan, such as a 25-year commercial real estate loan, amounts that are due within the next 12 months are still considered a current liability. This is typically the sum of principal, interest, loan fees, or balloon portions of the loan.
Other Short-term Debts
Payments you must make within the next 12 months that haven’t been included in any of the above categories on your balance sheet are also considered a current liability. Some examples can include dividends payable, credit card fees, and reimbursements to employees.
Example of How To Calculate Current Liabilities
To calculate current liabilities, you can review your company’s balance sheet and add all of the items from the current liability formula, which will capture all expenses due within 12 months.
In the example below, adding up each of the items gives us a total of $135,000 for current liabilities:
- Notes payable: $50,000
- A/P: $10,000
- Short-term loans: $20,000
- Accrued expenses: $5,000
- Unearned revenue: $10,000
- Current portion of long-term debts: $25,000
- Other short-term debts: $15,000
How To Calculate Average Current Liabilities
In some cases, you may need or want to know the average of your current liabilities over a certain time frame. This can give you insight as to whether it’s trending up or down.
To calculate your average current liabilities, you can use the following formula:
For example, if your current liabilities for 2021 was $100,000 and your current liabilities for 2022 was $150,000, you would add them to get $250,000. Then, divide it by the time period being measured, which is two years, to get average current liabilities of $125,000 over the past 24 months.
Why You Should Know Your Current Liabilities
Knowing the amount of your current liabilities is one component of ensuring your business is financially healthy and can at least satisfy its short-term obligations. This can help you stay current on your short-term obligations and maintain a strong credit score. You can also compare your current liabilities to your available cash or other current assets that could quickly be liquidated in case you have a cash flow shortage.
Current liabilities is also something that lenders might look at if they’re deciding whether you qualify for a business loan. Lenders like to see companies that are highly liquid with an ability to generate cash to pay off debts. Your company’s current ratio and quick ratio are two items a lender can look at in determining your company’s liquidity.
This is calculated by taking current assets and dividing them by current liabilities. Current assets are items that can be turned into cash within the next 12 months. A current ratio greater than one generally indicates a company that has enough liquidity and assets to meet its short-term obligations.
This is calculated by taking a company’s quick assets and dividing them by its current liabilities. Quick assets are items that can be converted to cash easily but don’t include inventory or prepaid expenses, so it’s more conservative than the current ratio. A quick ratio greater than 1 generally indicates a company has the ability to turn its most liquid assets into cash to meet its short-term obligations.
Your company’s balance sheet will give you the information needed to calculate your current liabilities. It’s an important figure to know because it’s an indicator of how well you can meet short-term obligations due within the next 12 months. It could also impact your ability to get a small business loan. Being knowledgeable about your company’s current liabilities can be an important step in ensuring its short- and long-term success.