Calculating Debt Service

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Whether you are launching or growing a business, you will likely need outside funding.  Can you afford the loans? How do the loans affect your profitability and cash flow?

To best understand the impact of the loans, you need to know a few things:

  • How much money are you borrowing?
  • What are the terms of the loan?
  • What will be your monthly payments?  If you know the amount and term of the loan, then calculating the monthly payment is straightforward.

For “quick and dirty” cash flow projections, knowing the monthly payment is sufficient to know how much revenue (and cash) you need to earn each month to support your monthly payments.

If you are assembling an investor package to include financial projections (Pro-Forma Income Statement, Balance Sheet and Cash Flow Statement), then you will need to look at the numbers with more detail. You will need to know the following information:

  • Total Annual Debt Service: this is monthly payments (principal and interest) times 12.
  • Monthly and Annual Interest Expense: Each monthly payment has a portion allocated to repayment of the principal and a portion is interest expense.  The interest expense will appear on the income statement and as a cash outflow on Cash Flows from Operations section of the Statement of Cash Flow.
  • Monthly and Annual Principal Repayment: Each monthly payment has a portion allocated to repayment of the principal and a portion is interest expense. The principal repayment will appear on the Cash Flows from Financing section of the Statement of Cash Flow.  Further the amount of principal repaid will be used to calculate the ending balance of what is owed on each loan at the end of the year; this will appear on the balance sheet.
  • Ending Balances for the Balance Sheet: At the end of each month, quarter and year, what do you still owe on each loan?

This worksheet calculates all the information you need for both the “Quick and Dirty” cash flow projections as well as the more detailed investor packages for up to 5 loans.

Need more help? We offer phone consultations with screen-share to coach you through the use of this template.

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