Debt Service Coverage Ratio: This Is How to Calculate It

Debt Service Coverage Ratio: This Is How to Calculate It

Your DCSR plays a major role in the direction your company will take when dealing with debt. A debt service coverage ratio is one of the first headaches any business owner will deal with. Once you determine DSCR the first time, it is much easier to calculate in later years. 

What Is Debt Service Coverage Ratio?

DCSR determines the accurate capability of a company’s ability to repay its debt obligations with the current operating income. It’s easy to talk about, but complicated to get right. No two businesses will have the same evaluation, even if they have identical numbers. 

Figuring out the DSCR can get even more complicated when the balance sheet isn’t adjusted correctly. If any of the financial statements are off, then it becomes nearly impossible to get an accurate DSCR. Your assets and liabilities will have a strong impact on the DSCR, so timing is everything. So, if the business is in the middle of a buyout, the additional leverage may favor one company over the other. 

Finding the Right Formula

To get the right formula, you’ll need to check the net operating income and total debt servicing. This is the formula that will give you an accurate representation of your obligations. Software options for calculating DSCR differ, all offering their own unique benefits. 

The most common is Microsoft Excel. Companies that are already invested in using Microsoft Office products will prefer a DSCR themed Excel sheet. It’s easily shareable, editable and follows the uniform policies of the business. 

Smaller companies can always use an online calculator for a more simplified layout. The information can always be exported into the program of your choice. There is less control when using this method, so be wary of depending on an online calculator for complex business practices. 

Any actual software specifically meant for DSCR is usually built from the ground up for the company. These specialized scripts and programs are company dependent, and only after getting the blessing of the employee handling the finances. 

Optimizing Excel

The easiest way to optimize Excel for DSCR is by using downloadable templates. From that template, edit the formula to suit your company’s needs. Get rid of cells you don’t need, and repurpose titles to match what you care about the most. 

Once everything is set up with Excel, it is only a matter of inputting the company numbers. The sheet will do all of the hard work by calculating the DSCR automatically. Being able to plug in the numbers at ease will allow you to do quick comparisons to competitors. These quick side by side comparisons will help both your short term and long-term business growth. 

Security of Online Calculators

There are no security issues when using trusted DSCR calculators. No personal information is needed when inputting the numbers. If you run across a website that asks for personal company information, then use an alternative. Never offer up compromising personal information about your company on an unverified website. 

Wrap Up

It may seem daunting at first, but DSCR is a simple assessment at its core. Get over this first financial hurdle, and then move on to the next obstacle. Your business depends on forward thinking, and accurate financial information.

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