In our ongoing quest to empower entrepreneurs with crucial financial knowledge, let's dive into the next term in our dictionary: DSCR - Debt Service Coverage Ratio.
From securing a business loan to managing financial stability, Debt Service Coverage Ratio(DSCR) plays a pivotal role in critical situations that every entrepreneur faces. DSCR measures a company's ability to comfortably manage debt payments using operational income. Think of it as a health check for your company’s financial stability.
📈 The Math: If the DSCR is greater than 1, you're in good shape. It indicates your income can cover debt payments and then some. But if it's below 1, it's a signal to take action. Lenders scrutinise this ratio to assess whether you're a creditworthy bet.
💼 Why It Matters: DSCR isn't just a number; it's your financial security blanket. It tells you if your cash flow can weather the storm of repayments. A high DSCR boosts your creditworthiness, while a low one signals a need to strategize.
🚧 Cons: However, it's essential to note that DSCR has its limitations. It may overlook the timing of cash flows, potentially missing short-term liquidity issues. Also, it might not account for industry-specific nuances and can be manipulated through accounting practices.
Stay tuned as we continue our journey through the StrideOne Entrepreneur's Dictionary, equipping last mile entrepreneurs with essential financial wisdom.
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