Many people taken up bank loans because they need monies urgently for the period but they sometimes forget that the monies they borrow have to be repaid in full on top of the interest payments per month. In our experience in this field, we have seen many companies fail because they could not repay the loans.

How do you ensure that you can repay your loan obligations?

1.Remember that you ultimately have to repay the loan. If you take the loan to pay your own salary, are you confident that in the near future you can generate enough revenue for the company to repay its loan?
Always keep in mind the loans is current cash in anticipation of future benefits that is more than loan principal and interest repayment add up together.

2.There are certain financial ratios which you can to assess whether you are over borrowing i.e. interest cover, debt to equity ratio, etc. For this article, however we will try to explain using cash flows statement to assess in a very simplified explanation.
To generally calculate whether your company can your repay your loan repayments, take your latest cash flows statements and take your net cash from operating activities less your capital expenditure under investing activities less your targeted loan repayments during for the period under financing activities. If the figure is negative, you generally will not able to sustain the loan and interest repayments.
As conversed previously, cash flow are easily distorted due to common mistakes made in a cash flow statement resulting in wrong assessment of your company’s performance. Also note the above is a general calculation for a company that has generally take up of revenue evenly during the year.