How to Calculate Cash Flow to Creditors

Cash flow to creditors offers a perspective on how a company manages its financial obligations to lenders. This metric helps understand the net financial interaction between a business and its debt providers over a specific period. It sheds light on whether a company relies on new debt to fund operations or actively reduces its outstanding borrowings. Analyzing this component allows stakeholders to assess a company’s debt management strategies and overall financial health.

Understanding Key Components

Cash flow to creditors relies on two primary components: interest paid and net borrowing. Interest paid refers to the actual cash outflow a company makes to its creditors for the use of borrowed funds. This figure represents the true cash cost of debt, which may differ from the interest expense reported on an income statement due to accrual accounting principles.

Net borrowing represents the change in a company’s long-term debt obligations over a period. It is the difference between any new debt a company issues and any existing debt it repays. A positive net borrowing indicates that the company has taken on more new debt than it has repaid, increasing its total debt burden. Conversely, a negative net borrowing means the company has repaid more debt than it took on, thus reducing its outstanding debt.

Identifying Data on Financial Statements

To calculate cash flow to creditors, you will need to refer to a company’s financial statements: the income statement, balance sheet, and sometimes the statement of cash flows. The cash amount of interest paid is often found in the operating activities section of the statement of cash flows, or in the financing activities section if presented separately. If not explicitly stated as cash interest paid, it can often be derived from the interest expense on the income statement, adjusted for any changes in interest payable from the balance sheet.

Net borrowing is determined by examining the long-term debt accounts on a company’s balance sheet for two consecutive periods. You will look for line items such as “Notes Payable,” “Bonds Payable,” or “Long-Term Debt.” The change in the balance of these accounts from the end of the prior period to the end of the current period will reveal the net amount of new debt taken on or old debt repaid. For instance, comparing the long-term debt balance from December 31, 2023, to December 31, 2024, will show the net borrowing activity for the year 2024.

Performing the Calculation

The formula for cash flow to creditors is: Cash Flow to Creditors = Interest Paid – Net New Borrowing. To determine net new borrowing, subtract the prior period’s long-term debt from the current period’s long-term debt. For example, if a company’s long-term debt was $100,000 at the end of the prior year and $120,000 at the end of the current year, its net new borrowing is $20,000.

Consider a company that paid $5,000 in cash interest during the year. If its long-term debt increased from $100,000 to $120,000, its net new borrowing is $20,000. Applying the formula, the cash flow to creditors would be $5,000 (Interest Paid) – $20,000 (Net New Borrowing), resulting in -$15,000. This negative figure indicates that the company received $15,000 in cash from its creditors on a net basis, meaning it borrowed more than it paid out in interest.

Conversely, if the same company paid $5,000 in cash interest, but its long-term debt decreased from $120,000 to $100,000, its net new borrowing would be -$20,000 (a net repayment). In this scenario, the cash flow to creditors would be $5,000 (Interest Paid) – (-$20,000 [Net New Borrowing]), which equals $25,000. A positive cash flow to creditors of $25,000 signifies that $25,000 in cash flowed from the company to its creditors, indicating that the company repaid more debt than it took on, in addition to paying interest.