How to Calculate the Financing Required for a Business
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5. FINANCING REQUIRED
Financing is required when a company has a cash deficiency in any month. As shown above, Red Deere Electronics is forecasting a cash deficiency of $2,000 in April, 200X. Therefore, the company must acquire some form of financing to assist them in paying their April obligations (expenses). Below illustrates the forecasted financing required by Red Deere Electronics.
| FINANCING REQUIRED: | JAN. | FEB. | MAR. | APR. | MAY | JUNE |
| Bank Loan | $ 0 | $ 0 | $ 0 | $10,000 | $ 0 | $ 0 |
| Less Interest & Principal Payments on loan | $ 0 | $ 0 | $ 0 | $ 200 | $ 200 | $ 200 |
| NET FINANCING Effects (C) | $ 0 | $ 0 | $ 0 | $ 9,800 | $ (200) | $ (200) |
As you can see, the company plans to receive a bank loan of $10,000 in April. Note: we are assuming the interest and principal payment on the loan will be $200 each month. As a result, the Net Effect of Financing in April will be $9,800 ($10,000 - $200). Since the company does not require financing in May and June, the Net Effect of Financing for these months will only consist of the money leaving the company to pay its interest and principal payments on the $10,000 loan. As a result, a negative $200 appears in this account and is subtracted from cash.