What interest expense is
Interest expense is the cost of borrowing over a period. It includes cash interest paid and can include amortization of fees or discounts depending on your accounting.
Interest expense formula
Interest expense = average debt balance * interest rate (for the period).
How to calculate interest expense (step-by-step)
- List each debt instrument and its interest rate (fixed or variable).
- Compute the average balance for the period (not just ending balance).
- Multiply average balance by the rate for the period and sum across loans.
- Add non-cash interest (amortized fees or discounts) if you report GAAP interest expense.
Example
If average debt is $1,000,000 at 8% annual interest, annual interest expense is about $80,000. For a quarter, divide by 4.
Net interest expense vs interest expense
Net interest expense = interest expense - interest income. If interest income is higher, you report net interest income.
Cash vs non-cash interest
- Cash interest affects runway and cash flow directly.
- Non-cash interest (fee or discount amortization) affects accounting profit but not cash.
- Track both in planning so you do not confuse cash burn with accounting expense.
Where it appears on financial statements
- Income statement: typically below operating income (EBIT/EBITDA).
- Cash flow statement: non-cash interest is added back; interest paid is shown in operating or financing depending on policy.
- Balance sheet: accrued interest increases liabilities until paid.
Common mistakes
- Using ending balance instead of the average balance for the period.
- Mixing annual rates with monthly periods without conversion.
- Ignoring variable-rate resets and rate caps.
- Forgetting to include amortized fees or discounts in GAAP interest expense.