As one of the most important financial statements that the accountants from an accounting firm in Johor Bahru would generate for the business owners, the balance sheet provides a lot of information to the entrepreneurs as well as the company’s stakeholders. Besides analysing the assets of the company, they should also focus on the company’s liability. This is because if the company fails to manage its liabilities well, the business may fall into a severe financial crisis which may lead to bankruptcy.
Business owners may divide the company’s liabilities into two categories, which are the current liabilities as well as the non-current liabilities. Current liabilities are the financial obligations that a company needs to pay in one year. In contrast, the non-current liabilities refer to those that the company has to pay after one year.
Business owners may analyse the liabilities of their company by using the debt to equity ratio. Two elements that involve in the calculation of this ratio is the company’s non-current liabilities and the shareholder’s equity. As mentioned above, non-current liabilities are the debts the company should pay after one year. On the other hand, shareholder’s equity is the sum of preference share capital and equity share (Also see Understanding the Issuance of Bonus Shares)capital, plus the accumulated profits that the company has earned.
To calculate the debt to equity ratio, business owners should divide the non-current liabilities of the company by its shareholder’s equity. This ratio is a measure of the proportion of the company’s debt when compared to its shareholder’s equity. By using this ratio, business owners will be able to know the weightage of liabilities and equity, respectively.
Besides, business owners can use the current ratio and quick ratio to analyse the current liabilities of their company. Both ratios are liquidity ratios, and they help business owners to determine the ability of the company to settle their current liabilities. To calculate these ratios, business owners need to know the amount of the company’s current liabilities. The only difference is that the current ratio uses the current assets in its calculation, while the quick ratio uses the company’s quick assets in the calculation.
When calculating the current ratio of the company, business owners should divide the company’s current assets by its current liabilities. On the other hand, to calculate the quick ratio, they should divide the quick assets by current liabilities. Current assets and quick assets differ from each other in the way that current assets include the accounts receivable, cash and cash equivalent, inventories, as well as other current assets. In contrast, quick assets exclude inventories from the items listed above.
In conclusion, business owners should analyse the liabilities of their company regularly so that they can take corrective and preventative measures to amend any problems that arise from the management of the company’s liability. One of the issues that often associate with liabilities is the company’s cash flow, as business owners need to ensure that their companies have enough cash to pay debts. Thus, besides using the ratios stated in the article just now, business owners can also use the accounting cycles, such as the cash conversion cycle and cash collection cycle to monitor the time required for the company to generate cash.