This KPI establishes your total interest payments against the value of your Cash Profits.
When you approach your bank manager to borrow money, their concern is whether or not you can afford to pay the interest on your loan, as they usually have your buildings as security against the principal loan value. This is how they assess your business in this area.
Example:
A) Annual Interest Payments = R90,697 B) Cash Profits = R412,263 C) Interest Cover = 22% (A ÷ B X 100)
Discussion:
In many cases, your Bank Manager will calculate this figure and if it is less than the guideline of 33% they may ask you if you are borrowing enough money.
Ironically, they do not assess your business's ability to repay the whole of the loan repayment and therefore it is critical that you also calculate the Loan Repayment % for yourself.