Calculating Repayment Capacity Of A Business

Maybe some of you do not know exactly what Debts to Service Ratio (DSR) is.

Well it portrays your business's cash flow capacity toward repayment of credit facilities. Bankers must know this ratio very well just like eating their staple foods daily. Below is the calculation. It may not be the exact formula based on the accounting theory but rather simplified for benefit of laymen.

Cash-Flow Projection - Monthly

Projected Sales i.e. 1,000,000
less Average COF @ 70% = (700,000)
less Average SGA @ 10% = (100,000)
Plus Average Depreciation say 5,000

Thus Pre-Tax Profits = 205,000 (A)

Interest and instalments for existing loans say 50,000
Plus new interest or instalment for this new application say 5,000
Thus total commitment is 55,000 (B)

Therefore Expected Debt Service Ratio (DSR) = A/B
which is 205,000 / 55,000
= 3.73

DSR Ratio of more than 2 indicates better cash flow or repayment capacity.

The point here is, even though working capital calculation (discussed earlier in previous topic) justified to your capital requirement, DSR will sometime in opposite.

Businessmen, please consider this ratio very seriously especially in increasing your gearing.