Interest Received

Quick reference

• 00:05 If you've lost the interest in interest,
• 00:07 I'm afraid you're going to have to pick up your interest again.
• 00:10 Because we've got more interest to receive, namely interest received.
• 00:17 Time for that slide again.
• 00:19 Yes we're still going from A to B.
• 00:20 We're still building our checks, our operational,
• 00:23 our working capital adjustments, our assets.
• 00:26 And key here, we're still in financing.
• 00:29 What I wanted to actually say here is that there's another form of financing
• 00:34 that we haven't considered yet and I'm not talking about equity.
• 00:38 I'm talking about the fact that if we have surplus cash on hand,
• 00:42 when we stick in the bank, we'll earn interest on it.
• 00:45 And we better consider this, the interest received.
• 00:48 Yes, we'll still pay tax on it.
• 00:50 It'll report in the financial statements and the bill, the key outputs.
• 00:55 But where does interest received go?
• 00:58 Now, I've put it in this section.
• 01:00 So, I'm going to net it off against interest expense.
• 01:03 But I want to be clear this isn't always the case.
• 01:06 In some models, in some forecasts, it will actually be put before the earnings,
• 01:11 before interest tax depreciation and amortization line.
• 01:15 That is the EBITDA line.
• 01:17 So it will go in as other income, just after operating expenditure.
• 01:23 So just be aware, just because I've done it this way doesn't mean it will work
• 01:26 the same in every single model.
• 01:28 But troll accounts will be the same, it's just where you put it.
• 01:31 Think of it like the balance sheet.
• 01:33 The balance sheet, I've taken what's called the net assets approach.
• 01:36 I've got assets less liabilities but in the US for
• 01:40 instance they often will add liabilities to equity.
• 01:42 It's fine, it's still the same principle.
• 01:44 It's just where you lump the totals so don't get hung up on it.
• 01:49 What's our problem?
• 01:50 Let me explain graphically.
• 01:53 Interest revenue is calculated as the average cash multiplied by the prevailing
• 01:57 interest rate for the period, so far so good.
• 02:01 What's average cash?
• 02:03 Average cash is the proportion of the opening cash,
• 02:06 plus one less that same proportion of closing cash.
• 02:09 So typically what we'll have is 50% of opening cash,
• 02:13 plus 50% of closing cash where the 50% of closing cash is actually one minus 50%.
• 02:19 In other words, it's opening cash plus closing cash over two.
• 02:22 That's common but not always necessarily technically correct.
• 02:27 So, what's closing cash?
• 02:29 Well, closing cash is simply the opening cash plus the change in cash held.
• 02:32 I can cope with that.
• 02:35 But change in cash held is your net cash receipts plus your interest revenue.
• 02:40 Hang on a minute.
• 02:41 Interest revenue, do you see we've got a circular going here?
• 02:45 We've got to break this loop and this is the problem.
• 02:47 How do we break it?
• 02:49 People will often do copy and paste macros or things like this.
• 02:53 And sometimes when they build these macros they mess them up because you keep
• 02:58 pressing the macro button and the interest just keeps going up and up and up.
• 03:02 I've actually seen things where you've borrowed a few thousand dollars.
• 03:05 I've managed to get the interest into the billions.
• 03:07 Honestly, I could be a loan shark using some of these spread sheets.
• 03:12 So I honestly say, stay away from macros because,
• 03:15 it's just possible to calculate it algebraically.
• 03:19 I say that but, you're not gonna like it.
• 03:23 Now this is not a maths course.
• 03:26 But sometimes you have horror formula, that you need into a spreadsheet,
• 03:30 because there's no other way.
• 03:32 So, I'm not planning to go through this calculation completely here,
• 03:36 other than explain the terms.
• 03:38 OB is the opening cash balance of the period, CB is the closing cash balance of
• 03:42 the period and M is the non-interest cash movement for the period.
• 03:45 Which is including any interest paid, it's just not the interest received element.
• 03:52 I is interest cash movement for
• 03:53 the period you're trying to calculate, R is the interest rate.
• 03:56 T tax and X is the proportion into the period.
• 03:59 So if x is zero that means the movement occurred at the beginning of the period,
• 04:03 x is 100% it means the movement occurred at the end of the period.
• 04:06 Now 50% would mean half way.
• 04:08 Then there's this big horror calculation but
• 04:11 the key thing is to see the very last bit.
• 04:13 That the interest is calculated, is the opening balance multiplied by the interest
• 04:17 rate, plus one minus the proportion.
• 04:20 Times the non-interest cash movement for
• 04:22 the period, times one minus the tax rate, times the interest rate all over.
• 04:26 Open brackets, one minus open brackets, one minus the proportion into the period,
• 04:31 close brackets, times open brackets one minus the tax rate close brackets times
• 04:35 the interest rates close brackets.
• 04:37 If you can understand that, then congratulations,
• 04:41 you can get your Ph.D at the door.
• 04:43 But we're going to use this formula to actually fill out the calculation that
• 04:46 we have to do in this section.
• 04:49 Talking of which, let's go do it.

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