How to Calculate Short-Term Debt for a Business

Identifying Short-Term Debt Components

Short-term debt, often referred to as current liabilities, represents financial obligations a business expects to settle within one year from the balance sheet date or within its normal operating cycle, whichever period is longer. This timeframe is important for classification because it helps stakeholders assess a company’s immediate financial obligations and its ability to meet them.

Accounts payable signifies money a business owes to its suppliers for goods or services purchased on credit. These amounts are usually due within 30 to 90 days. Short-term loans are borrowings to be repaid within 12 months. These can include lines of credit or short-term notes from banks.

The current portion of long-term debt refers to the segment of a long-term loan, such as a mortgage or bond, that is scheduled for repayment within the upcoming year. While the overall loan may span many years, the part due in the current period is reclassified as a short-term obligation. Accrued expenses represent costs incurred but not yet paid, such as employee salaries, utilities, or interest. These obligations are paid soon after they are incurred.

Unearned revenue, sometimes called deferred revenue, arises when a business receives cash payment for goods or services not yet delivered. This creates a liability because the company owes the customer the product or service, and this obligation is fulfilled within the next 12 months. Short-term notes payable are formal written promises to pay a specific sum by a defined short-term date. Dividends payable represent dividends declared by a company’s board of directors but not yet disbursed, with payment expected soon.

Locating Information on Financial Statements

To ascertain a business’s short-term debt, the primary source of information is its balance sheet. The balance sheet functions as a financial snapshot, presenting a company’s assets, liabilities, and owner’s equity at a specific point in time. This statement provides a structured view of what a company owns, what it owes, and what its owners have invested.

Within the balance sheet, you will find the relevant information primarily under the “Liabilities” section. Look for a sub-section labeled “Current Liabilities.” This section lists all obligations due within one year or the operating cycle. Businesses present this information in a standardized format to ensure clarity and comparability.

Each component of short-term debt, such as accounts payable, short-term loans, or accrued expenses, will have its own line item within this “Current Liabilities” section. The monetary value for each obligation will be stated next to its category. Review each line item within current liabilities to identify all amounts that contribute to the total short-term debt.

Performing the Calculation

Once all the individual short-term debt components have been identified and located on the balance sheet, the calculation of total short-term debt is straightforward. The process involves aggregating all the monetary values listed under the “Current Liabilities” section. This summation provides a comprehensive figure representing all obligations due within the short-term period.

To perform this calculation, simply add together the amounts for each current liability line item. For example, if a business has Accounts Payable of $25,000, Short-Term Loans of $15,000, and Accrued Expenses of $10,000, the calculation would involve summing these figures. The sum of $25,000 plus $15,000 plus $10,000 equals a total short-term debt of $50,000.

This resulting sum represents the total amount of money the business owes that is expected to be settled within the next 12 months or its operating cycle. This figure is crucial for understanding a company’s liquidity position and its ability to manage its immediate financial commitments. By systematically identifying and adding these obligations, a clear picture of a business’s short-term financial demands emerges.