Understanding how to calculate business debt is crucial for maintaining financial stability and making informed decisions. Whether you’re applying for financing, managing cash flow, or evaluating your business’s risk – knowing your total debt gives you a clear picture of where you stand. In this article, we will walk through the main types of business debt, how to calculate it, key financial ratios to watch and practice tools to help you stay on top of your obligations.
What is Business Debt?
Business debt refers to any financial obligations a company owes to outside parties. This can include bank loans, lines of credit, equipment leases, accounts payable and other borrowing base funds used to support operations or growth. Business debt generally falls into two categories: short-term debt, which is due within 12 months; like supplier invoices or short-term loans, and long-term debt, which extends beyond a year: such as business mortgages or multi-year loans. Understanding these types of debt is key to managing liabilities and planning the future.
Why Knowing Your Total Debt Matters
Knowing your total business debt is essential for evaluating your company’s financial health and risk level. It helps you understand how much you owe, how it affects your cash flow and whether your business is overleveraged. Accurate debt figures are also crucial for budgeting, financial forecasting and maintaining creditworthiness.
How to Calculate Total Business Debt
To calculate your total business debt, start by listing all short-term liabilities- these are debts due within 12 months, such as accounts payable, credit card balances and short-term loans. Next, list your long-term liabilities, like business loans, leases or mortgages that extend beyond one year. Add both amounts together to get your total business debt. Keeping this information organized in a simple spreadsheet or accounting software can make tracking easier and more accurate.
Key Debt-Related Financial Ratios
Understanding debt ratios helps evaluate your business financial strength and risk exposure.
Debt-to-Equity Ratio:
Formula: Total Debt / Shareholder’ Equity
What it shows: How much your business relies on debt versus owner investment. A high ratio may indicate higher financial risk.
Debt Ratio:
Formula: Total Debt / Total Assets
What it shows: The portions of your assets financed by debt. A lower ratio suggests stronger financial stability.
Interest Coverage Ratio:
Formula: EBIT (Earnings Before Interest and Tax) / Total Assets
What it shows: Your ability to pay interest on outstanding debt. Higher is better, showing you can comfortably cover interest costs.
These ratios help investors, lenders, and business owners understand if a company is carrying too much debt, managing it well or at risk of financial strain.
Common Mistakes to Avoid
When tracking business debt, it’s important to avoid a few common pitfalls:
Forgetting off-balance obligation
Example: Not accounting for lease commitments or co-signed loans that don’t appear on the balance sheet but still pose risk.
Not updating debt records regularly
Example: leaving old loans listed as active or missing newly acquired credit lines in your reports.
Ignoring interest costs or balloon payments
Example: Only tracking the principal balance and being caught off guard by large end-of-term payments or rising interest expenses.
How to Avoid These Mistakes
To stay financially prepared- and avoid costly surprises, it’s essential to proactively manage your debt and stay ahead of common pitfalls.
- Review your liabilities month – make debt tracking part of your regular financial check-ins.
- Include all financial commitments – Track leases, guarantees, and any other obligations, even if they’re not on the balance sheet.
- Use accounting software or debt management tools – Automate tracking and get alerts for due dates or unusual payment terms.
- Plan for interest and balloon payments – build these into your cash flow forecast so there are no surprises.
How to Manage and Reduce Business Debt
Effetely managing debt is key to long-term financial stability. Here are practical strategies businesses can use:
Prioritize high-interest debt
Focus on paying down the debt first to reduce overall interest expenses,
Improve cash flow
Streamline operations, speed up receivables and manage inventory to reduce reliance on borrowing.
Avoid unnecessary short-term debt
Only take on debt when absolutely necessary and backed by a clear return on investment.
Key Take Aways
Managing business debt isn’t just about tracking what you owe – it’s about taking control of your financial future. By understanding your total liabilities, using key ratios to assess your financial health and avoiding common pitfalls, you’ll be better equipped to make smart decisions and grow with confidence.
Debt doesn’t have to be overwhelming – especially when you have the right tools and support in place. Get a free consultation with a representative to get a tailored solution for your business.
