Cloud Controller Inc. | How to Calculate Current Portion of Long-Term Debt (CPLTD)
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How to Calculate Current Portion of Long-Term Debt (CPLTD)

How to Calculate Current Portion of Long-Term Debt

How to Calculate Current Portion of Long-Term Debt (CPLTD)

The absence of CPLTD creates unreliable statements.

A current liability is defined as company’s debts or obligations that are due within one year, appearing on the company’s balance sheet and include short-term debt, accounts payable, accrued liabilities and other debts.

For the most part, this account is well understood. Certain accounts go in current liabilities while other accounts go into long-term liabilities.

The confusion exists when an account needs to be included in both. This occurs with long-term debt, creating the need of having Current Portion of Long-Term Debt on your balance sheet.

What is Current Portion of Long-Term Debt?

As mentioned above, a current liability is a company’s debt or obligations that are due within one year.

Long-term debt as a whole is not due within a year, but the company will likely have required payments due within the year.

These required payments are current liabilities.

The CPLTD account shows this amount of LTD due within the next 12 months.

The Importance of CPLTD?

Omitting CPLTD from your balance sheet creates unreliable financial information.

Among many items, the reader is unable to complete an accurate liquidity measure as all current liabilities aren’t included.

Depending on the amount of your term debt, this absence can make a material difference.

Example:

Balance Sheet without CPLTD

Balance Sheet without CPLTD

The above example shows a balance sheet without CPLTD included. We’ll measure liquidity using the current ratio. Current ratio calculation is as follows:

$1,302,326 (Current Assets) / $134,861 (Current Liabilities) = 9.66x, a favorable ratio.

This shows a company with incredible liquidity, attractive for all investors or creditors.

Now we properly present our financials, including CPLTD.

Example:

Balance Sheet with CPLTD

Balance Sheet with CPLTD

This example shows a properly completed financial statement, including CPLTD. Notice that we have two sources of CPLTD. One for our SBA loan, one for your Seller Carryback debt.

Let’s recalculate our current ratio with updated information.

$1,302,326 (Current Assets-Unchanged) / $365,115 (Current Liabilities) = 3.57x. Still impressive, but a material decline from 9.66x. This alone shows the importance of including CPLTD.

To throw in another tip, look at our inventory amount.

Inventory accounts for a lot of our current assets, and some of it appears to be illiquid as it’s a work-in-progress or raw material. We don’t feel comfortable considering this inventory as liquid, we’d like to have a different view on liquidity.

Insert the quick ratio. A ratio designed for this situation.

$532,082 (Cash plus Accounts Receivable) / $365,115 (Current Liabilities) = 1.46x.

This ratio is still favorable and we are comfortable with this liquidity, but we realize how big of difference CPLTD can make. We’ve also realized the importance of using different ratios to perform our analysis.

How to Calculate CPLTD?

Current portion of long-term debt is the amount due over the next 12 months. To calculate this, we simply need to total the principal portion of our payments over the next 12 months.

The key word in this calculation is principal.

A common confusion with this account is taking actual payments.

Actual payments include interest expense, an income statement account. This portion will be accounted for when completing our income statement, it should not be included on the balance sheet.

The principal portion is a balance sheet account, this is the portion we need to complete CPLTD.

In the next example, let’s assume we took a $100,000 loan out on 12/31/2015. The note is amortized at 5 years, an interest rate of 4%. The note took place on the last day of our financial year, a payment won’t be due until January 31st, 2016. However, this note still took place in FY 2015 and we need to record on our ending balance sheet.

The first step is finding an amortization schedule. An amortization schedule separates principal and interest for us.

Example:

Amortization Schedule

Amortization Schedule

This amortization schedule shows our payment schedule over the next 12 months (2016). Month 0 is our current month of 12/31/2015. Since this loan took place on 12/31, all we need to do is calculate the sum of principal payments.

Example: 

Ending Balances

Ending Balances

The above diagram shows that we will have $22,099.83 of payments for 2016. $3,664.46 is attributed to interest expense, $18,435.37 is attributed to principal. Applying this to our year-end statements creates our next example.

Example:

Breakdown of CPLTD

Breakdown of CPLTD

The above example shows our liability section at 2015 year end (numbers are rounded). The new debt is shown in two different places, LTD and CPLTD.

Adding these together equals $100,000. This shows that our company will have an LTD principal reduction of $18,435 in 2016, and our total loan balance at YE 2016 will be $81,565.

Additional Considerations

For the purposes of learning, we used an example where debt took place at year end. This is the easiest scenario, but it is unlikely that debt will always take place during the last month.

If debt takes place during the year, it’s important to start this amortization table in that month. You will still use principal amount of payments over the next 12 months, the only difference will be your starting month.

Example:

Amortization Table

Using the same numbers as our recent example, we now assume the loan started in July 2015.

We are completing our 2015 year end financials, meaning the amount at December 31st is the amount that will show on our statements.

To properly account for CPLTD, we add up principal payments for our upcoming year.

Amortization 3

This example shows our principal portion of payments totaling $18,745 in 2016.

We can now apply this to our balance sheet.

Example: 

Ending Balance Sheet

The above example shows our year-end liabilities section. The sum of LTD and CPLTD equals our ending balance of $92,408 in December 2015. We can expect a loan balance of $73,663 at the end of 2016.

Recap

Current portion of long-term debt is an important account that does not find its way onto many small business financial statements.

Now that you know how to calculate a current portion of long-term debt and its importance on your financials,  you’re only doing yourself harm if you continue to omit.

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