Many treasurers we speak with frequently ask about the best ways to capture and automate their debt service coverage ratio (DSCR).
Often, they’re looking for solutions to replace manual, error-prone spreadsheets and outdated methods that leave room for costly mistakes.
Questions like "Can this tool provide visibility into my debt coverage ratios?" and "How do I ensure compliance more easily, especially with new issuances?" come up regularly.
The debt service coverage ratio is a key financial metric that shows your ability to repay debt.
This blog explains how to calculate DSCR, common pitfalls to avoid, and how tools like DebtBook can automate DSCR tracking and modeling to improve compliance and reduce risk.
The debt service coverage ratio is a financial metric that shows how well your organization can meet its debt obligations using available revenue.
It compares your available revenue to your debt payments and is a key indicator of your financial stability and borrowing capacity.
You're comparing the money you have on hand to the amount you owe in debt repayments. A higher ratio generally means you’re in good shape, while a lower ratio could signal potential trouble ahead.
Debt Coverage Ratio = Net Operating Income ÷ Total Debt Service
Capturing debt service coverage ratios accurately can be surprisingly tricky for many organizations, largely due to outdated processes and manual methods.
Many organizations still rely on manual methods to collect data for DSCR calculations.
This often involves pulling information from multiple systems or spreadsheets, which is both time-consuming and prone to errors.
Spreadsheets may seem convenient, but they’re highly susceptible to formula errors, broken links, and data entry mistakes.
Even small inaccuracies can have significant consequences.
Manual data collection typically results in reporting lags, which can hinder timely decision-making and proactive debt management.
Inaccurate calculations can lead to covenant breaches, financial penalties, or unexpected insolvency scenarios that catch your organization off guard.
To improve your DSCR tracking and compliance, consider the following best practices:
Debt covenants are legal agreements that often require your organization to maintain a minimum debt service coverage ratio and tracking this metric is a key part of staying in compliance with lenders and avoiding penalties.
When you capture your debt service coverage ratio accurately and consistently, you can:
Modern tools can automate and simplify DSCR calculations, helping to eliminate many of the issues caused by outdated methods.
Benefits of automation include:
While capturing your DSCR accurately is essential, understanding how future financing decisions could affect it is just as critical.
That’s where DebtBook’s Sizing feature comes in.
DebtBook’s Sizing feature gives treasury teams powerful financial structuring capabilities that most organizations haven’t historically had access to.
It enables you to structure, compare, and analyze new money issues and fixed-rate loans within the context of your existing debt portfolio.
With DebtBook's Sizing tool, you can:
With DebtBook’s Sizing feature, you gain deeper visibility into how financing decisions influence your debt coverage ratios before you finalize them.
"I can basically send a new senior financial analyst to the tool and say, ‘Create five different scenarios with these assumptions,’ and I feel confident that they could get me something within an afternoon."
Joshua Benson, Capital Finance Manager, City of Milwaukee
Maintaining visibility into your debt coverage ratio calculations is essential to preserving your organization’s financial health and compliance. When your team automates your processes you can stay ahead of covenant issues and make better-informed decisions.
Take proactive steps today to improve your financial oversight and long-term stability.
A: A DSCR above 1.0 generally indicates that an organization has sufficient revenue to cover its debt payments. Many institutions aim for a DSCR of 1.2 or higher for added financial cushion.
A: The debt service coverage ratio is calculated by dividing your revenue available for debt service by your total debt service obligations.
A: Yes, but manual methods using spreadsheets can be error-prone. Tools like DebtBook automate the process for better accuracy and real-time insights.
A: Yes, DCR (Debt Coverage Ratio) and DSCR (Debt Service Coverage Ratio) are often used interchangeably.
A: Breaching covenants can trigger penalties, accelerate repayments, or negatively impact your credit rating.
A: Using specialized financial software like DebtBook centralizes the data needed for the calculation process, ensuring accuracy and compliance.
Disclaimer: DebtBook does not provide professional services or advice. DebtBook has prepared these materials for general informational and educational purposes, which means we have not tailored the information to your specific circumstances. Please consult your professional advisors before taking action based on any information in these materials. Any use of this information is solely at your own risk.