Short-Term Debt refers to the portion of a company’s borrowings and financial obligations that must be repaid within the next twelve months. Common examples include bank lines of credit, commercial paper, current installments of long-term debt, and other short-term borrowings.
Why is Short-Term Debt Important?
Short-Term Debt is important because it:
Impacts Liquidity: Represents near-term cash obligations that must be managed alongside operating cash flow.
Affects Working Capital: Influences the current ratio and overall working capital position (Current Assets − Current Liabilities).
Reflects Financing Strategy: Indicates how a company uses short-term funding to support operations, seasonal needs, or temporary cash shortfalls.
How is Short-Term Debt Calculated?
Short-Term Debt is reported on the balance sheet under current liabilities and calculated as the sum of all borrowings due within one year:
Short-Term Debt = Current Portion of Long-Term Loans + Bank Overdrafts + Commercial Paper + Other Short-Term Borrowings
Where each component is measured at the principal amount outstanding as of the reporting date.
Additional Considerations
Interest Rates and Covenants: Short-term borrowings often have variable rates and may include restrictive covenants that affect financial flexibility.
Refinancing Risk: Companies must assess their ability to refinance or repay debt when it matures, especially during tight credit markets.
Cash Flow Planning: Effective cash management ensures that sufficient funds are available to meet short-term debt obligations without disrupting operations.