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# How does the calculation for the line of credit work?

• Peter Lynch

Note: I thought it would be a good idea to start posting answers to questions I receive via email. I try to answer all of them but occassionally my job gets in the way…

This question refers to the video titled “Integrating Financial Statements.”

The Line of Credit (“LOC”) is calculated using the =MAX function (row 113 in the model). This function returns the largest value in a set of values. The formula contains two values: (1) 0, and (2) the LOC balance in the previous period minus cash available or (required).

=MAX( 0 , [LOC Balance] – [Cash Available or (Required)] )

If cash is “available” it will reduce the LOC balance. If the amount of cash “available” is greater than the remaining LOC balance the formula will return “0” (LOC Balance cannot be negative). And if cash is “required” the LOC Balance will increase.

I always find it helpful to look at the model. Click on the image to the right of this explanation for the corresponding video / model.