Opening Balance Sheet – Debt Payment Term
Debt finance is normally evidenced by a note or document which specifies the amount, interest rate, and date of payment. The date of payment will dictate the payment term for the debt, for example a debt might be repayable in five years time.
Debt Opening Balance in the Financial Projection
In the previous step the opening balance sheet debt was entered, and in order to allow for this debt to be repaid, an opening debt payment term needs to be entered.
For an established business the payment date for the opening debt will normally be found in the loan agreement supporting the debt.
If the financial projection is for a start up business, then the anticipated terms of payment need to be used. For example, if the business plans to buy new machinery, it might plan to take out a three year loan to pay for this, and a term of three years would be entered.
Whichever term you choose to use, the important thing is to get a best estimate and start the projection. At a later stage, the value can be amended if payment terms need to be adjusted to satisfy the lenders requirements or to improve the cash flow.
As a guide, it is normal to try and match the term of the debt with the life time of the asset it is being used to pay for. For example, a machine with a useful life of three years might be matched with a three year loan, whereas a property purchase might require a thirty year mortgage.
Having entered the opening debt payment term, the template calculates the opening debt principal and interest payments for each subsequent year using a loan amortization schedule. It should be noted that loan repayments are assumed to occur at the end of each year.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template, is to enter the opening capital in the opening balance sheet of the financial projection.
This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial projections for a business model.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.