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A business plan should handle loans, interest, and repayment following standard accounting
convention. Amounts of new loans (after start-up) go into the Cash Flow table in the upper section
as money received. Interest, which is an expense deductible against income, goes into the Proﬁt and
Loss statement. Principal repayments go into the Cash Flow table in the lower section, as spending.
Some people are confused by the concept of separating the payment into interest and principal. A
common example, at least in the United States, is making payments on a mortgage. Most lending
institutions clearly separate payments into interest and principal components. Even if you write
a single check each month to repay the mortgage loan, the payment is divided into interest and
principal. Detailed Principal Payments Function
Your software is likely to have functions to calculate principal and interest payments from
assumptions, so you can project payments over time without having to estimate each one. In the
following illustration, the spreadsheet uses a built-in ﬁnancial calculator to estimate the principal
payments required for the sample case we’ve been using. (Note: For this illustration, we display
the numbers in dollars, not thousands of dollars, as they are displayed in other illustrations in this
chapter.) CHAPTER 16: CASH IS KING USING 16.13
THE PRINCIPAL PAYMENTS FUNCTION (PPMT) Use the computer to calculate principal payments for the cash ﬂow table. (This table is taken from
Business Plan Pro®, and shown in dollars, not thousands of dollars).
In the sample, the company borrowed $400,000 in a 10-year loan at 8.5% per year several years ago.
During the sample plan period, it is making regular payments of just under $5,000 per month. The
interest portion of the payment is calculated automatically in the Proﬁt and Loss table. The principal
portion of the payment is calculated using the formula below, which you can copy into your own
worksheet. The formula for the ﬁrst month’s principal payment is:
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