Definition
Debt amortization is the scheduled repayment of principal over time, reducing the outstanding balance.
Formula
Ending balance = beginning balance - principal payments
Example
A $1M loan with $20k monthly principal payments amortizes by $240k in year one.
How to use it
- Amortization reduces interest expense over time as the balance falls.
- Model amortization explicitly in cash forecasts and covenants.
- Separate principal from interest to avoid overstating operating expense.
- Use an amortization schedule to forecast DSCR and covenant headroom.
Common mistakes
- Confusing amortization with interest-only periods.
- Ignoring prepayment penalties when accelerating principal.
- Mixing accounting amortization with actual cash repayments.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Debt Amortization" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Loan amortization: how monthly payments and total interest work) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Liquidation Preference Calculator (1x): Estimate investor proceeds at exit under a simple 1x non-participating liquidation preference vs converting to common (simplified).
- Multiple Valuation Calculator: Estimate enterprise value and equity value from a metric (ARR or revenue) and a valuation multiple (with net debt adjustments).
- DCF Sensitivity Calculator: Estimate how enterprise value changes with discount rate and terminal growth assumptions (simple 3x3 sensitivity).
- Loan Payment Calculator: Compute monthly payment, total interest, and total paid for a loan using amortization.
- APR to APY Calculator: Convert APR to APY (and APY to APR) given compounding frequency.
Guides
- Loan amortization: how monthly payments and total interest work: A practical guide to loan amortization: monthly payment formula, why interest dominates early, and how term and rate affect total interest.