Skip to main content

4.4.1 Current Debt

Your bank issues current debt in one-year notes. The Finance area in the Capstone Web Application displays the amount of current debt due from the previous year. Last year’s current debt is always paid off on January 1. The company can “roll” that debt by simply borrowing the same amount again. There are no brokerage fees for current debt. Interest rates are a function of your debt level. The more debt you have relative to your assets, the more risk you present to debt holders and the higher the current debt rates.

As a general rule, companies fund short term assets like accounts receivable and inventory with current debt offered by banks.

Bankers will loan current debt up to about 75% of your accounts receivable (found on last year’s balance sheet) and 50% of this year’s inventory. They estimate your inventory for the upcoming year by examining last year’s income statement. Bankers assume your worst case scenario will leave a three- to four-month inventory and they will loan you up to 50% of that amount. This works out to be about 15% of the combined value of last year’s total direct labor and total direct material, which display on the income statement.

Bankers also realize your company is growing, so as a final step bankers increase your borrowing limit by 20% to provide you with room for expansion in inventory and accounts receivable.

< Previous Page       Next Page >

As a Capsim Capstone Business Simulation India participant, you’ll experience the responsibilities of a CEO firsthand, making decisions that directly influence your company’s performance in critical areas such as marketing, finance, operations, and human resources. This immersive experience is tailored for serious business enthusiasts.