This page reviews working capital issues in project finance models. Depending on the way you structure your model, working capital can be a very simple matter or a complex issue. Some issues in modelling working capital in project finance models include (1) modelling initial working capital as part of the sources and uses of funds before commercial operation; (2) modelling a working capital facility and excluding the working capital facility from gearing and the capital structure for debt sizing; (3) modelling working capital needs in the initial period of operation through sculpting or a grace period; and (4) the highly complex task of modelling working capital when the period of the model is shorter than the days of working capital outstanding. In developing this website my friend Mike Flynn helped a great deal. He created diagrams of how the problem of working capital can be modeled if the time period of the model is monthly and the accounts receivable are not collected for 45 or 100 days. If you have questions about the complex modelling of working capital, Mike will respond to your e-mail. His address is .
Introduction to Working Capital Problem
In a project fiance model, working capital arises from computing revenues with a meter and then sending a bill out at the end of a month. After sending out the bill you may have to wait more than a month to get paid. Indeed, in some places, the delay in payments can become a big issue and you may have to model downside scenarios where you are not paid for a year or longer. When modelling working capital, a few basic points should be considered:
- The working capital calculations in a project finance model come from revenues and operating expenses and perhaps taxes. If debt repayments and interest come are semi-annual and your model is also semi-annual, you do not have to worry about these. This is why you make you model semi-annual.
- You can generally compute working capital after revenues and expenses (i.e. before financing and taxes if you make sensible structured model that starts with operations).
- As long as the working capital days are less than the days in the period (e.g. the accounts receivable days are 30 and the period is semi-annual), then the days as a percent of the days in the period can be used to derive working capital. You can then compute the total amount of receivables and payables.
- Once you compute the total amount of receivables and payables, you can compute the change in working capital that is an item in CFADS and cash flow analysis.
Alternative Ways to Finance Initial Working Capital
A few of the ways to deal with the financing of working capital include:
- Computing initial working capital as part of the sources and uses of funds before commercial operation;
- Creating a working capital facility and excluding the working capital facility from gearing and the capital structure for debt sizing;
- Including working capital needs in the initial period of operation through sculpting or a grace period in debt;
Difficult Problem when the Days Outstanding is Longer than the Working Capital Period
Problem when periodicity changes