top of page
  • bluecollarcfofl

Adding Cash By Reducing Debt 101 (Interest Rate Analysis)

The goal of every business is to add as much cash as possible by reducing debt and using the existing assets to create more inflows of money to the business.

As a business owner, you may be perplexed as to how this cash flow puzzle all works together and exactly how to effectively manage cash and create a thicker cash balance.

My goal is to help you understand the basics of cash flow and how to better manage the financial part of your business.

Let's first look at the different ways cash flows through your business.

Operating Income: The income that is created through the operations of your business.

Investment Income: The income that is created from investments that the business is holding.

Operating Expenses: The expenses that are incurred by the operations of your business.

Interest Expenses: These expenses are "use fees" of any debt that the company may be holding to fund operating activity.

For this discussion, we are not going to focus on how to manage cash in the operating section of the business, but rather how to manage the debt and investment portfolio of your business.

Let's use these simple examples to illustrate how three different $50,000 cash allocations to the debt and investments of your company, differ in the actual cash growth;

Highest Interest Rates

Heavy Debt Focus

Credit Card Interest Rates

Note that these are simple illustrations are to help you understand the power of interest rates and the decision making that goes on when managing your assets and liabilities. To keep things simple, these tables contain simple interest rates only. This helps us compare apples to apples when needing to make a decision around how to spend the cash.

But many times, your cash flow analysis is more complicated because there are different ways the interest and returns are calculated.

For instance, Credit Card debt interest is calculated by the compound interest method which calculates interest daily. And, there are even more ways that income can be generated from assets. Point being, your analysis should be based on the exact interest calculations of your debt type and an accurate income forecast from investments.

Back to simplicity. These three examples above have one difference; how the $50,000 was allocated between the debt and investments. Just based on the cash allocation between example 1 & 2, there was a gain of $81.25 by pushing cash to the HIGHEST INTEREST RATE "IR" Percentages in example 1.

The lowest return on how the cash was used, was in example 3. Notice that the highest percentage debt was not paid down and how it affected the overall performance of the cash spent!

This is really simple mathematics as you are generally pushing cash towards the highest interest rates and/or highest returns. This doesn't always hold true as it really depends upon the balances of the accounts. For this reason, I am attaching the Excel spreadsheet that I used for this analysis. You can enter your balances, interest and return rates, and it will calculate your cash growth. Again remember that there are various ways to calculate the interest and return amounts, so a more complex calculation may be needed.

Simple Interest Cash Allocation Calculation
Download XLSX • 16KB

The central principle in this article is that you should be looking at your cash management this way in order to reduce debt and/or grow investments as effectively as possible.

Unfortunately, many business owners do not understand the value of accounting and suffer the consequences of not having someone overseeing how to financially grow the business. If you need assistance in any type of accounting area, check out how Blue Collar CFO can help you in building your business further.

Blue Collar CFO


bottom of page