What are liabilities?

Liabilities are future sacrifices that your business will be required to make.  In your books, you must record any liabilities for moneys that you owe.  For example, a credit card purchase creates a liability; you owe the money.

There is another kind of liability, however, which is more insidious.  This is a monthly cost which you have agreed to pay, such as a service contract.  For example, many website services charge a monthly fee.  While this doesn’t necessarily need to be recorded as a liability on your books, it in effect creates a liability because it will require a future sacrifice.  These fixed costs will hurt your business’s flexibility.

Needless to say, beware liabilities. When managed carefully, they can help your business grow.  However, if they go out of control, they can quickly destroy an otherwise successful business.