Proper planning is one of the keys to a financially healthy business or household. Knowing your debt-to-income ratio is one of the ways to make proper financial plans.
Who need the debt-to-income ratio? Businesses, organizations, and even individuals.
Is the debt-to-income ratio for those in debts alone?
The debt-to-income ratio is for any individual or businesses that make expenses routinely; daily, weekly, monthly, or yearly. Such individuals or businesses might not necessarily be in “debt” per say, in the sense of having borrowed some money from the bank (or money lenders) and are obliged to pay within a particular period.
For individuals, primary expenses like feeding, house rents, car maintenance, children school fees, are part of what make up the debts used to calculate debt-to-income ratio.
For companies, expenses like workers salary, allowances, mortgage, etc. are part of what make up the debts used to calculate debt-to-income ratio.
Debt-to-income ratio helps an individual or organization make proper, reasonable, and financially wise expenses. Also, banks or money-lenders will not loan out money to those with a “poor” debt-to-income ratio.
How do you calculate your debt-to-income ratio?
Debt-to-income ratio for a month is simply the total amount of expenses or payments in a month divided by the total income in a month; that is debt divided by income.
For a company, monthly debt or total expenses may include may include monthly salary payments, mortgage payments, minimum maintenance expenses, loan payments (if any), allowances, and etc. The sum of all these is known as the Debt.
On the other hand, Monthly Income may include company’s average monthly net income (for your company’s average annual net income, you will have to divide by 12 to get the monthly value), and any other miscellaneous incomes.
Debt-To-Income Ratio = Total Debt / Total Income (x 100)
Financial experts will tell you that a company or individual is in a very good financial state when its debt-to-income ratio is below 30%. Anything above 40% is termed “outrageous” and might need financial help or counseling.
When is your debt-to-income ratio poor? When it is 40% or above.
What can do you do reduce your debt-to-income ratio?
Reduce expenses. This can be achieved by eliminating expenses that are not obligatory or necessary.
Also, you will have to do something extra to increase income. You may want to make some more investments or get an extra job. For a company, however, increase in sales and production might be the central focus for increased income.