Reading debt-service capacity month by month

An annual income statement can show a surplus while the bank account falls short in a particular month. Loan instalments are paid with available cash on their due dates, not with an annual accounting result.

Start after operating needs

Bring forward opening cash, then add expected customer receipts when they are likely to clear. Deduct suppliers, wages, rent, tax and the working-capital purchases needed to keep trading. Existing finance payments come before the proposed new instalment.

Non-cash expenses such as depreciation do not leave the account, but that does not mean all accounting profit becomes repayment cash. Stock purchases, slower debtors, capital expenditure and owner drawings can absorb it.

Find the lowest point

Calculate closing cash for every month and carry it into the next. The important observation may be the lowest balance, not the yearly total. Seasonal businesses should line up procurement months, customer terms and tax dates rather than dividing annual values by twelve.

Apply a credible downside

Test assumptions that fit the business: a major debtor paying 30 days later, lower unit volume, a weaker margin or a supplier requiring earlier payment. Do not stack implausible disasters merely to produce a dramatic result. The purpose is to show whether ordinary variance removes the instalment headroom.

A good application identifies the weak month and explains the available response—existing cash reserve, adjusted drawdown, reduced borrowing or a documented standby contribution.