Financial Modeling for Projects

Introduction

In the world of finance, it is extremely important to be able to forecast the future cash flows and operations of an investment or business. Often this study is done using a financial model, a comprehensive financial document used to forecast the future of the business over the next 3-5 years.

However, some investments may have a longer payback period or may have some aspects that need to be monitored over a longer period of time to ensure that they remain profitable. For these reasons, it is very common for companies to undertake ‘project finance‘. This is analysis of a particular investment over a longer period of time, usually between 10 and 30 years.

Unique aspects of project finance

Unlike full-scale financial plans, which focus on the income statement, balance sheet and cash flow statement, project finance is mainly about the three types of cash flows: Operating, financing and investment costs.

Since project finance takes a longer period of time into account, the project duration is also divided into stages. This subdivision is mainly made because the different phases are usually of different complexity. However, this practise is also useful when creating a customised project, as clients have the option to choose the level of detail in each phase.

For example, in more complex and complicated stages, it may be necessary to introduce more detail to ensure that the model is understandable and self-explanatory, while simpler parts of the project may only contain basic information.

However, in project finance, it is extremely important to be as detailed as possible when analysing the financing and valuation phases, as these two aspects are the main factors determining the profitability of the investment.

In financing, it is not only necessary to consider the amount and the possible interest rate, but also all the other obligations associated with each financing method, as they can play an important role in the long term.

Likewise, it is also essential to estimate the cost of capital with extreme precision when evaluating the project, as the compound interest effect over such a long period of time could exacerbate even a small imperfection.

My financial modeling process

Over the years in close contact with many companies, I have developed and refined a process of financial modeling that ensures that every result is informative, easy to understand, error-free and above all: meets the client’s desire.

My financial 7-step financial modeling process is the following:

1. Define the important reporting KPIs and level of detail

The first steep requires sitting down with the client and discussing about what they would like to achieve with the project finance. This step will include defining all Key Performance Indicators (KPIs) and how detailed the project should be.

2. Understand the project’s business model and divide the project into stages

The second step is understanding the business model and how to create a project finance that perfectly fits the scope and characteristics of the business. In this step it is also important to define which are the financing possibilities of the project and the stages it will go through until completion.

3. Collect related data and build assumption sheet

The third step concerns performing deep research to collect as much relevant data as possible to ensure that the forecasts and the estimation of the cost of capital are as accurate as possible. Additionally, before building the model it is important to create an assumption sheet, which is the financial document containing all the needed assumptions to make the project work.

4. Develop a preliminary version 0.1

Then, it is the moment to draft a preliminary version of the project. This step is necessary to gather an initial feedback from the client and to ensure that everything is moving smoothly and error-free.

5. Align, test and improve until Version 1.0 is achieved

After the version 0.1 has been approved, it is mandatory to align, test and improve it until it reaches the ultimate stage. At the end, version 1.0 should be exactly what the clients expects and more.

6. Build different scenarios

This step is optional and generally used for more complex business cases, and it requires building a sensitivity and scenario analysis of the business case. This step helps achieve a more comprehensive result taking in consideration various highly likely situations.

7. Create a report or pitch:

Finally, the next step is producing a report or pitch that summarizes all important aspects that have been discovered in the project. In Addition, if requested by the client, I am also open to consultations and calls to create and perfect a pitch to be directly shown to investors or directors.

The Project Financial Model

After applying my 7-step procedure, one obtains a detailed project that covers a long time horizon. Moreover, the project becomes easy to understand not only because of the summary report and the pitch, but also because it is divided into smaller stages.

Additionally, the end result will focus on cash usage and cash reserves, while all cash inflows and outflows will be monitored at each stage of the process. However, if a client wishes to expand the scope of the project, it is possible to do so with an appropriate related analysis.

Related Analysis

In many cases, it may be useful to consider scenarios other than the one covered in the project in order to be prepared even if something changes, either internally or outside the company.

One of the most popular implementations for project finance is scenario analysis, which is used to identify any changes in KPIs if some aspect of the project changes. For example, how would the valuation of a 24-month project change if it took an additional 12 months to complete it?

Another important financial tool that is often added to a project finance is a fundraising analysis, which looks in depth at the sources of funds, the financial commitments involved and everything else related to the financing stage of the project. Furthermore, a fundraising analysis is very important as it provides additional insight into the cost of capital, leading to a better assessment of the discount factor.

My Services

Over the years as a financial modeler, I have found that different businesses have different needs when it comes to project finance. That is why I have decided to create two different packages for you to choose from.

The first is exclusively for project creation, which is carried out using my 7-step financial modeling process. This package is best suited for projects led by finance professionals who are already able to monitor and understand them without external help. In this case, my role would be solely to provide them with the tools they need to perform their job.

The second offer, on the other hand, is perfect for companies that need not only project analysis but also additional help in understanding, monitoring and pitching the project. In this case, I act as a business partner and financial expert to guide you through this project analysis

Build a universal template tailormade to your projects
Detailed stage simulation
KPI Report and Summary Sheet
Online Video Calls & Workshops

Video calls and exclusive support throughout the whole process
Coordinate with the team to collect relevant data and establishing assumptions
Deep level of details and a wide range of KPIs
Organised and professional presentation of the final results as a member of the team