Interest Expense Modeling without Circularity

Description
This Excel template shows a practical way to calculate interest expense when ending debt is a model output.

What does it mean?
We start with operating cash-flow (OCF), then subtract CAPEX, and consider change in the target cash on hand. The result is change in Debt. For example, if OCF is +10, CAPEX is -20, and there is no change in the target cash on hand, then change in debt = -10+20+0=+10

What is the problem?
The challenge is a circular dependency. Debt depends on cash flow, cash flow depends on net income, net income depends on interest expense, and interest expense depends on average debt — which in turn depends on ending debt. The loop closes.

What is the solution?
The model breaks this circularity using a separate proxy schedule, avoiding the need for iterative calculations or circular references in Excel.
The proxy schedule works as follows:

• Start with beginning debt
• Subtract EBITDA net of depreciation
• Add proxy interest (yes, we are calculating proxy interest based on ALL THESE items!)
• Add proxy tax (based on the above)
• Add investments in working capital and CAPEX
• Add changes in target cash
• Add back depreciation
  
  

This results in a proxy ending debt, which is then used to approximate average debt and compute interest.

There will be a small difference between proxy debt and actual modeled debt, but it is typically negligible and does not materially impact results. Overall, the approach improves model robustness, keeps calculations intuitive, and allows for quick scenario analysis without breaking model consistency.