When and how is current debt paid off?

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The number in the Due This Year Cell of the Finance area's Current Debt area is driven by three sources:

For example, suppose at the beginning of last round (January 1 of last year) you borrowed $3 million of Current Debt at a rate (stated on the Finance worksheet) of 10%. You had a Bond due at the conclusion of the round (December 31) with a face value of $7 million. Your sales forecasts were over-optimistic: Sales didn't materialize, your inventory swelled, and you needed a $10 million emergency loan from Big Al (Big Al charges your short-term rate plus 7.5%).


Proforma Balance Sheet

Your Balance Sheet (page 1 of last year's Annual Report) will show $20 million of Current Debt. Bondholders are paid, so your Long Term Debt (assuming no other Long Term transactions) will be down by $7 million. On the Income Statement (page 2), your Long Term Interest will include the interest paid out during the year on the $7 million bond. Your Short Term Interest will include interest on the $3 million Short Term (Current Debt) loan and on the $10 million Emergency Loan. Since your short-term interest rate this year was 10%, you will pay $300 thousand interest on the $3 million note. Your Emergency Loan interest will be 17.5% of $10 million or $1.75 million. Your total Short Term Interest will be $2.05 million. 


Next Year

Now it is a new year. You owe the bank $20 million, which displays in the Due This Year cell on the Finance worksheet. Your new short term (Current Debt) interest rate, which is driven by the prime rate and your credit rating, appears in the cell above. In the Borrow ($000) cell you see $0. Note that the default Borrow ($000) decision is always zero.

At the beginning of each round, a check is written for any amount that appears in the Due This Year cell (no special action is required; the simulation writes the check for you).

Returning to the example above, your decisions for the current round must take into consideration the $20 million due this year. This obligation is factored into the December 31 Cash Position projected for the end of the current round (the bottom cell in the Cash Positions area). You do not need to worry about whether your Current Debt check will bounce; Stock issues, Bond issues and new Current Debt are issued immediately; they will help cover the check. If you are still short of cash, your bank will cover you until cash flows from operations meet the obligation. However, if the current round's cash flows from operations should prove inadequate to meet the remaining balance and other operating expenditures, at the end of the round you can expect a visit from Big Al, who will write a check for the exact amount of the shortfall.