Modelling pre-operational cashflows

I am regularly asked by sponsors to include what would be considered ‘pre-operational cashflows’ (pre-commissioning). Traditionally this causes modellers a headache and so is often

• ignored - which means the sponsor or bidding consortium lose out on value
• included (badly) - which gives rise to more issues than it solves…

From a lenders perspective these these cashflows are generally too uncertain but from a sponsors point of view as soon as the turbine is putting electricity onto the grid or the gold processing equipment is operating there is value in that, just because the certifier has not signed off that doesn’t mean that output is not valuable. So the challenge that faces us as professional transaction modellers is accommodating both sets of requirements without increasing the complexity for the one that doesn’t need it and in the process blowing out the cost of the model audit.

How to model pre-operational cashflows in a project finance model

Typically the construction period is modelled monthly and operations on a quarterly basis so the challenge becomes how to model those early cashflows and have them flow through into the monthly construction phase efficiently.

Because of the ease which a solid financial model can transition between monthly and quarterly (at the end of construction) we no longer need a seperate worksheet for ‘construction’ the days of modelling a ‘construction’ worksheet are over. 

Read this post on pre-operational cashflow modelling in project finance on fimodo.com to find out more. 

As always, theres no rocket science, and the solution is hinged on keeping things simple, transparent and readily checked but if  it helps to see how we do it then please free to adopt this approach.