How to Calculate Interest Expense


PLEASE NOTE:  The Interest Expense Budget must await preparation of your Forecasted Cash Flow Statements. Why? Recall from previous discussions, one of the main purposes of a Cash Flow Statement is to determine the amount of financing (money) a business requires. That is, if your Cash Outflows exceed your Cash Inflows, in any giving month, then you will require additional financing (bank loans, government loans, family loans, or equity loans). Since you have not yet prepared your Forecasted Cash Flow Statement, you will not know how much financing (or additional financing) your business requires now or in the future. As you will see later in Murray's 200X and 200Y Forecasted Cash Flow Statements, he does not require additional financing. As a result, he will NOT be required to develop an Interest Expense Budget.

If your have applied for or anticipate receiving a personal loan from a bank, or a loan from a government agency, or a loan from a family member, you should already know your monthly interest expense arising from such loans. As a result, Budget 9 entitled "Developing your Operating Expenses Budget" should include the interest expense from these loan(s).  Therefore, this Budget does NOT refer to the interest resulting from loans you have already received or applied for. Instead, it refers to the interest expense resulting from additional loans that you are unaware of at this time, however, may need in the future. Your Forecasted Cash Flow Statements will determine such financing needs and requirements.

Categories: Forecasting