About Cost of Funds Calculator (Formula)
The Cost of Funds Calculator is a tool used to calculate the cost associated with obtaining funds or capital for a business or financial institution. It helps in assessing the expenses incurred in acquiring and maintaining borrowed funds. The formula to calculate the cost of funds is as follows:
Cost of Funds = (Interest Expense / Total Borrowed Funds) * 100
In this formula, Interest Expense represents the total interest paid or payable on borrowed funds, and Total Borrowed Funds refers to the total amount of funds borrowed.
To calculate the cost of funds, you divide the interest expense by the total borrowed funds, and then multiply the result by 100 to express it as a percentage. The resulting value represents the cost of funds as a percentage of the borrowed amount.
For example, let’s say a business has incurred $10,000 in interest expense on borrowed funds totaling $100,000. To calculate the cost of funds, you would use the formula:
Cost of Funds = ($10,000 / $100,000) * 100 = 0.1 * 100 = 10%
In this scenario, the cost of funds would be 10%, indicating that the business is paying an interest expense of 10% of the total borrowed funds.
The Cost of Funds Calculator is commonly used by businesses, financial institutions, and lenders to evaluate the cost-effectiveness of their borrowing activities. By calculating the cost of funds, they can assess the profitability and efficiency of their financing strategies. This calculator helps in comparing different funding sources, evaluating interest rates, and making informed decisions regarding borrowing and lending activities. Additionally, it aids in financial planning and budgeting, as it provides insights into the expenses associated with borrowed funds and helps in managing interest costs effectively.