Realized vs Unrealized Debt: Rule Two by Another Name?

Mark points out that liabilities on the balance sheet don't necessarily reflect all the liabilties a business (or an indivudal) has. Following Rule Two (Embrace Your True Expenses), there are known long-term, non-recurring expenses that will come up in a business. Operating with no debt on the balance sheet is a wonderful thing, but without sufficient reserves for those non-recurring expenses... Mark argues you are still carrying debt. It's just unrealized debt.

It's not on the balance sheet yet, but it will be without running a surplus and creating reserves to pay for the expense. This concept lies at the heart of the YNAB budgeting philosophy, but many businesses fail to embrace their true expenses and end up creating future debt liabitlies for themselves. Mark and Jesse discuss strategies for identifying these true expenses and building appropriate reserves for them.

Mark Butler, Virtual CFO

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