Short-term debt, also known as current liabilities, refers to debt obligations that are due within one year or within the business’s normal operating cycle, whichever is longer. These obligations are expected to be settled using the company’s current assets or through the creation of other current liabilities. Short-term debt is a crucial metric as it provides insights into a company’s liquidity position and its ability to meet immediate financial obligations.
Examples of short-term debt include:
- Accounts Payable: These are amounts owed to suppliers for goods or services purchased on credit. Typically, accounts payable are due within 30 to 90 days.
- Short-Term Loans: Loans or lines of credit that are due within a year. This includes bank overdrafts or other forms of short-term financing.
- Current Portion of Long-Term Debt: This is the portion of long-term loans or bonds that is due within the next year.
- Accrued Liabilities: These are expenses that have been incurred but not yet paid. Examples include wages payable, interest payable, and taxes payable.
- Notes Payable: Short-term promises to pay a certain amount, typically resulting from a more formal agreement or promissory note.
- Dividends Payable: Dividends that have been declared by the company but not yet distributed to shareholders.
- Customer Deposits: Amounts received from customers in advance for goods or services to be delivered or performed in the future.
- Other Current Liabilities: This category might include any other obligations that are expected to be settled within the next year or operating cycle, such as deferred revenue for services not yet provided.
On a company’s balance sheet, these short-term debts are listed under the “Current Liabilities” section. By comparing current liabilities (including short-term debt) to current assets, one can derive liquidity ratios, such as the current ratio, to assess a company’s ability to meet its short-term financial obligations.
Example of Short-Term Debt
Let’s explore a fictional scenario featuring a company named Breeze Airlines to illustrate the concept of short-term debt:
Breeze Airlines – Balance Sheet (Extract)
As of December 31, 2023
- Accounts Payable: $600,000
- Amounts owed to fuel providers, airplane maintenance firms, and catering companies for services and goods purchased on credit.
- Short-Term Loans: $200,000
- A bank loan taken to finance a recent advertising campaign, to be paid back within 9 months.
- Current Portion of Long-Term Debt: $150,000
- The part of a five-year bank loan that needs to be paid off in 2023.
- Accrued Liabilities: $100,000
- Broken down as:
- Wages payable: $70,000
- Interest payable: $20,000
- Taxes payable: $10,000
- Broken down as:
- Notes Payable: $50,000
- A formal agreement to repay a loan from a business partner within the next 6 months.
- Dividends Payable: $40,000
- Dividends declared in December 2023 but scheduled for distribution in January 2024.
- Customer Deposits: $30,000
- Amounts received from customers for chartered flights scheduled for early 2024.
TOTAL CURRENT LIABILITIES: $1,170,000
From the presented extract:
- Breeze Airlines has a total of $1,170,000 in short-term debt or current liabilities.
- This indicates the amount the company owes and is expected to settle within the next year using its current assets.
- If we had data on Breeze Airlines’ current assets, we could determine its liquidity position by calculating ratios such as the current ratio (current assets divided by current liabilities).
This example showcases the typical current liabilities a company might have on its balance sheet. Each item would typically come with additional details or notes in the complete financial statements.