Current liabilities

If current assets are the money coming in over the next year, current liabilities are the bills already queued up against it. They’re the obligations that will land on your desk before the next set of annual accounts, whether or not sales have a good year.

What counts as a current liability?

Under the AASB’s presentation rules, a liability is current if the business expects to settle it in its normal operating cycle, holds it mainly for trading, or must settle it within 12 months of the balance date. There’s a fourth, less obvious test: a liability is also current if, at balance date, the business doesn’t have the right to put off paying it for at least 12 months.

For a typical Australian small business, the list looks something like this:

• Trade creditors and accounts payable: supplier invoices on 7, 14 or 30-day terms
• ATO amounts: GST and PAYG withholding from the BAS, plus income tax
• Superannuation owed for staff
• Wages and leave accrued but not yet paid
• Credit cards and overdrafts
• Short-term loans, including caveat loans and most online unsecured loans, which are often repaid within a year
• The current portion of longer debts: the next 12 months of instalments on an equipment loan or commercial mortgage

The covenant trap

That fourth test catches owners by surprise. Suppose a bank term loan has three years left but includes a covenant requiring a minimum interest cover. If the business breaches it and the bank hasn’t waived the breach by 30 June, the bank technically has the right to call the loan in. At that balance date, the whole loan may need to be shown as current.

The effect on the accounts can be dramatic. A healthy-looking balance sheet suddenly shows short-term debts far larger than short-term assets, which can unsettle other lenders, suppliers who check credit reports, and even a buyer looking at the business. If you suspect a breach, talk to your accountant and your bank before balance date, not after.

Worked example: an electrical contractor

An electrical contracting company in Geelong has these current liabilities at year end:

Item	Amount
Supplier accounts (wholesalers)	$62,000
BAS: GST and PAYG withholding	$34,000
Super for the June quarter	$11,000
Accrued annual leave	$18,000
Online short-term loan, nine months left	$48,000
Next 12 months of ute and equipment finance	$27,000
Total	$200,000

Current assets are $210,000, mainly debtors from builders. The current ratio is about 1.05, which is thin. If the owner refinanced the $48,000 short-term loan into a three-year business term loan, only around a third of that debt would sit in current liabilities next year. Total current liabilities would drop to roughly $168,000 and the ratio would lift to about 1.25, without a dollar of extra profit. Spreading the debt over three years does mean paying interest for longer, so it’s worth checking the total dollar cost against the cash flow relief.

If short-term debts are crowding out everything else, see whether a longer facility could spread them.

Why lenders care

A lender reading your balance sheet wants to know whether the next 12 months of obligations can be met from the next 12 months of cash. Current liabilities that keep growing faster than sales, a rising ATO balance or a stack of short-term loans all point to a business that is funding itself by deferring. That doesn’t rule you out, but it shapes which lenders and products fit. Our page on refinancing expensive short-term debt looks at that scenario in detail.

Related terms

• Current assets: what current liabilities are measured against.
• Accounts payable: what you owe suppliers.
• Working capital: current assets minus current liabilities.
• Loan covenant: the promises that can turn a long loan into a short one.

When the next 12 months look crowded

Plenty of sound businesses hit a stretch where tax, super and short-term loan repayments all fall due together. A tidier structure, such as one longer loan instead of several short ones, or a facility for an ATO debt, can give the business room to breathe.

Our form takes a minute or so, and enquiring doesn’t touch your credit file. Your details aren’t broadcast to multiple lenders, so you won’t be fielding calls all week. A real person works through what you send and calls you; accurate figures for what you owe and when it’s due help us get the recommendation right straight away.

Ask about restructuring short-term debt →