Current portion of long-term debt is the amount of long-term debt obligations that must be paid off within the next twelve-month period, and is an ongoing process that is often updated monthly. It is important to maintain this accounting process to compare the long-term debt with current cash and cash equivalents, and to avoid damaging the company’s credit or relationship with any current creditors. Potential creditors and investors will consider the balance between cash flow and the current portion of long-term debt.
A current portion of long-term debt is the amount of long-term debt obligations that must be paid off within the next twelve-month period. Many companies use standard accounting practices to rate this portion of long-term debt, a process that makes it easy to build viable annual budgets. The idea behind identifying the current portion of the long-term debt is to make sure that budgets are organized in a way that the debt can be met within the terms associated with that debt. This in turn allows the company to avoid incurring late fees and possibly damaging the company’s credit rating.
Although the methods vary slightly, the basic means of accounting for the current long-term debt position is to include what is known as a liability section on the company’s balance sheet. Within this section, the obligations are segregated into long-term debt and short-term debt. Long-term debt is anything that is scheduled to be paid off in more than the next twelve months, while short-term debt includes any and all obligations that are scheduled to be paid off within the next twelve months. As payments on each of the open debt obligations move into that twelve-month term, that amount is deducted from long-term debt and moved to the short-term debt subset in the liabilities section. This means that the realignment of the current portion of the long-term debt is an ongoing process that is often updated at least monthly.
Maintaining this type of accounting process makes it much easier to compare the long-term portion of the debt with current cash and cash equivalents that the business can use to pay off debt in a timely manner. Assuming that cash flow is sufficient to handle the current payments due on the outstanding debt, the company can move forward with no real impediment to meeting its obligations. If trends in cash flow indicate that the level of that regular cash inflow will fall below the amount needed to adequately service current debt, steps can be taken to reduce costs or otherwise generate funds so that those obligations still remain. are fulfilled in accordance with the terms. By doing so, it is possible to weather a slow business season without damaging the company’s credit or relationship with any current creditors.
Potential creditors will often take a close look at the relationship between the portion of long-term debt held by a business and the amount of cash flow the current business enjoys. Larger current debt coupled with relatively small cash flow is a sign that the business may not be a good credit risk, as the chance of default is somewhat higher. Investors will sometimes consider this very factor and avoid investing in a business where the balance between cash flow and the current portion of long-term debt is considered unfavorable.
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