When you enter a long-term loan into your LivePlan forecast, you may notice that it appears on your Balance Sheet and Cash Flow statements in two ways: as both Short-Term and Long-Term Debt.
To explain why a loan is split this way, let's begin with a definition of each type of debt:
What is Short-Term Debt?
Short-Term Debt is any financing that will be paid back within the current 12 months. If you've entered a loan in your forecast that will last for 12 months or less, the entire loan is short-term debt. If, on the other hand, you've entered a loan that will be paid back over multiple years, then the part you'll pay back within the current 12 months is short-term debt.
Similarly, if you've entered a line of credit in your forecast, the portion that will be paid back within the current 12 months is also considered short-term debt:
What is Long-Term Debt?
Long-Term Debt is the portion of a loan that will not be paid back within the current 12 months. So, for example, if you enter a 60-month (or 5-year) loan into your forecast, the part you'll pay back in the first year becomes short-term debt, while the amount you'll pay back in Years 2-5 is long-term debt:
Why do we need both?
Breaking a loan into both short-term and long-term segments is useful in planning for cash flow, and it helps you maintain a picture of the future health of your business.
Let's take that earlier example of a 5-year loan. Obviously, you don't need to come up with the funds to pay all of that debt back at once. But you will want to make sure you have enough funds to pay back what you owe on that loan this month, and this year. This is why it's helpful, through the Short-Term Debt line on your balance sheet, to keep track of what that amount is.
By the same token, the Long-Term Debt line on your balance sheet helps you see how much debt your business will be carrying in future years. That's a useful view to have if you're considering taking out additional loans or lines of credit.
The long-term debt amount will also be of interest to potential investors as an indicator of the future solvency of your business.
Why doesn't the short-term debt amount change as I make payments?
Here's the slightly more complicated part of this concept, and it's well-illustrated by these screen shots:
In this example, we have a very simple loan: $40,000.00, paid over 40 months with 0% interest. That creates a monthly payment of $1000.00. LivePlan has broken this loan into two parts:
- The current 12 months of the loan are short-term debt, totaling $12,000.00.
- The remaining $28,000.00 is now long-term debt.
You may notice in the screen shots above that the long-term debt is decreasing by $1000.00 each month as you make payments, but the short-term debt stays the same each month.
There are two reasons for this:
- Each month, your $1000.00 payment is applied to the short-term debt
- Then, each month another $1000.00 of the long-term debt rolls into short-term debt
Short-term debt will always be 12 months' worth of a loan, until the point where the loan has less than a year left on it. So in essence, although your payments are being applied to the short-term debt, each month another month of short-term debt is added back in. So the short-term amount appears constant, while your long-term amount decreases.
Naturally, if your loan has interest included, it makes this picture more complex. But the calculations will be the same as above.
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