Debt service: principal, interest and the cash payment gap

Forecast debt service with two linked schedules: principal outstanding and cash payments. Calculate interest using the agreement's balance and timing convention, deduct principal from debt and cash, and compare payment dates with cash actually available. A period coverage ratio above one can still hide a reserve shortfall in a particular month.

Define the cash available before debt payments

For this planning example, cash available for debt service means customer and other included operating receipts less operating cash payments, cash taxes and the maintenance capital payments included in the plan, before loan interest and principal. Keep the definition beside the calculation. A lender may use a different numerator, adjustments and testing period; the example does not establish covenant compliance.

Collect the opening principal, draw dates, repayment schedule, rate convention, fees and maturity from the actual agreement. Do not infer the next payment from last month's amount if the rate changes or a balloon is due. Uncommitted refinancing is a separate possibility, not an automatic receipt.

Build the principal and interest roll-forward

Assume $100,000 opening principal, no new draws or fees, $5,000 principal repaid at each month-end and a 12% nominal annual rate calculated as 1% of opening monthly principal. This is a deliberately simple teaching convention, not a current loan quote or a general rule for daily interest.

Closing principal equals opening principal + draws − principal repaid. Interest is separate: the first payment reduces principal by $5,000, not $6,000. If you deduct the full payment from debt, the balance falls too quickly and later interest is understated. If you put only interest into cash, you miss $15,000 principal over these three months.

With opening principal in B2, draws in C2 and repayment principal in D2, closing debt in E2 is =B2+C2-D2. Under this example's convention, interest is =B2*12%/12. Reference a separate rate input in a working model. Midmonth draws, daily accrual, variable rates and capitalized interest need the actual contractual treatment rather than this shortcut.

Carry debt service into the bank balance

Assume $10,000 opening bank cash and cash available under the definition above of $8,000, $5,000 and $9,000 across the three months. The selected minimum month-end cash reserve is $9,000.

Total cash available is $22,000; total principal and interest is $17,850. The simplified period coverage is 22,000 ÷ 17,850 = 1.23 times after rounding. The bank schedule also shows how the second month's $950 cash deficit is funded from earlier cash.

Find the shortfall that the period ratio misses

Now reduce month-two available cash from $5,000 to $2,000, leaving other inputs unchanged. Month-one cash remains $12,000; month two closes at $12,000 + $2,000 − $5,950 = $8,050. That is $950 below the $9,000 reserve. Month three closes at $11,150.

Total available cash is still $19,000 against $17,850 service, or about 1.06 times. The positive period surplus does not remove the month-two reserve breach. Inspect the exact payment and receipt dates as well: even a satisfactory month-end balance can conceal a payment due before the month's cash arrives.

Keep principal movements separate from operating performance. IAS 7 distinguishes changes in borrowings as financing activity; the planning cash definition used here is not a claim about universal statement classification of interest or a lender's coverage formula.

Check the maturity and financing conditions

Extend the schedule through any large final payment. $5,000 monthly amortization is not enough information if the remaining $85,000 becomes due shortly after the displayed horizon. Add the contractual maturity amount and date instead of assuming another loan replaces it.

For a possible cash shortfall, compare only responses that can take effect by the payment date, including their fees and later repayments. Use the downside-action guide to set that deadline, the weekly cash forecast for detailed timing and the equipment cash guide to avoid omitting capital commitments. Use the actual agreement and appropriate review for covenant or contractual decisions.