How to Review Project-Finance Cash Flows, Step by Step

Review a project's cash by fixing one year, building down from revenue to what is available for debt service, and naming every deduction the record leaves out. For Tapti Crossing Infrastructure Private Limited, Rs 310 crore less Rs 62 crore is Rs 248 crore against debt service of Rs 182.70 crore, a cover of 1.36 times in that year alone.

Why is reviewing a project's cash a sequence rather than one division?

The whole review ends in a single division: cash over what has to be paid. If that were the job, this guide would be one line long. The reason it is nine steps is that the division is easy and the two figures going into it are not, and almost every review that goes wrong goes wrong somewhere above the division rather than in it.

Tapti Crossing Infrastructure Private Limited is a single-asset toll road company, invented for teaching, formed to build and operate one crossing. The company has no other business, no trading history and no second source of cash. Compare that with Harivansh Packaging Limited, the packaging maker used elsewhere in these notes: several plants, several customer groups, years of accounts. A reviewer at a company with many cash sources can look past one weak line. A reviewer at a project with one asset cannot, so the review is written down as a procedure rather than carried in the head.

Every figure that follows is arithmetic on the record this project locks. The 9.5 per cent is Tapti Crossing's own contracted rate, and a market rate would move every interest figure below it. One year of collections cannot be extended into a second, so the review ends in a written list of the periods it could not reach.

1. Fix the period and write it at the topOne year, named, before any figure is entered on the sheet.
   Checking: does the sheet say in words which year every figure below belongs to?
2. Build down from revenueThe review starts at the top line the record does contain and subtracts down from there.
   Checking: did the review start at revenue, or at a row somebody else had already totalled?
3. Name the deductions the record does not carryList what has not come out yet, as a step with its own heading.
   Checking: is the list empty, and if it is not, is the word ceiling written beside the figure?
4. Build debt service for the periodInterest computed on the balance, plus the principal scheduled in that period.
   Checking: was the interest figure computed here, or copied from a sheet with no period on it?
5. Divide, and write the base and the period beside the answerThe ratio and its two labels go into the same line of text.
   Checking: could this ratio be lifted into somebody else's note and still be identified?
6. Compute the fall that removes the coverThe spare, then the same spare expressed as a fall in revenue.
   Checking: is the fall stated against the line that actually varies?
7. Convert the reserve into timeDivide the reserve by the debt service it is there to pay.
   Checking: is the reserve stated in quarters, or still sitting there in rupees?
8. State the residual and what it is notThe cash left for the sponsors, with its exclusions written beside it.
   Checking: has anybody been able to read that figure as a return over the life?
9. Write the list of periods the record cannot showThe unseen items, listed and handed over with the review.
   Checking: is the list attached to the output, rather than left unwritten?

Two of those steps look optional and are not. Step three has no arithmetic in it at all, and step nine produces no figure. Step three and step nine are the two most likely to be dropped, and dropping either turns a correct sheet into a misleading one.

Which period is under review, and how is that stopped from slipping?

Step one is a sentence written at the top of the sheet: this review covers the modelled year. The sentence is the whole step. Fixing the period feels like something a reviewer would obviously keep in mind, and keeping it in mind is exactly how it gets lost.

Step one protects every division that follows. Every figure on the sheet is going to be divided by another figure on the sheet. A periodThe stretch of time a figure belongs to. A year, a half year, a quarter. Two figures can only be compared or divided when they cover the same stretch. mismatch does not announce itself: an annual cash figure divided by a half year of obligations produces a perfectly readable ratio that is roughly twice what it should be, and nothing in the answer looks odd. The wrong ratio has the right shape, the right size and the right number of decimals.

Think of a household working out whether it can afford a loan instalment. Monthly take-home pay against a quarterly insurance premium gives an answer that looks fine and is wrong by a factor of three, and the mistake is invisible because both figures are true. Writing the period once, at the top, before any figure is entered, is what makes a later mismatch visible. Every figure that follows is then entered against a stated claim rather than against nothing.

How does the review get from revenue to the cash the lenders are paid from?

Step two builds down. Start at revenue, the top line the record does contain, and subtract. For Tapti Crossing Infrastructure Private Limited the record carries revenue of Rs 310 crore and operating cost of Rs 62 crore. Earnings before interest, tax, depreciation and amortisation is revenue less operating cost, and for this year EBITDAEarnings before interest, tax, depreciation and amortisation. Revenue less operating cost, before anything to do with funding, tax or the wearing out of assets. It is a profit measure and not a cash figure. is Rs 248 crore, a margin of 80.0 per cent.

Note the margin and then leave it alone. An 80.0 per cent margin is ordinary for a road, where the asset is built once and then largely just sits there being used, and it would be extraordinary in almost any business that buys and sells things. The margin is a feature of the kind of asset, not evidence about this project.

Why build down rather than up? Because building up means starting from a figure somebody has already computed. Every model of a project has a row already labelled cash available, and starting there means accepting whatever that row contains without ever seeing what went into it. Building down forces the reviewer past every line the record does contain. Walking every line the record has is the only way to find out which lines it has not.

How does the review find the deductions the record has left out?

Step three is the step with no arithmetic in it, and it is the one this whole guide exists to defend. Before Rs 248 crore is called the cash available for debt serviceThe cash a project has in a period to pay interest and principal with, after everything that must be paid ahead of the lenders has been paid. Often shortened to CFADS., what has not yet come out of it is written down.

On this record, two things have not. There is no tax charge for the project company anywhere in the figures. There is no maintenance spendingMoney spent keeping an asset in the condition it has to be kept in. On a road it is resurfacing and repair. It is cash out of the door, and it does not appear in an operating cost line that has not been built to include it. either, and a road is a thing that gets resurfaced. Neither absence means those costs are nil. The absence means the record does not carry them. A cost the record omits and a cost of nil are different statements, and the two have to be written differently.

So the Rs 248 crore gets relabelled. The figure is not the cash available for debt service. The figure is a ceilingThe most a figure could possibly be. Not an estimate and not a result: an upper limit, which is all that can honestly be claimed when some deductions are known to be missing and their size is not. on the cash available for debt service, and every ratio built on it is therefore a ceiling too.

The household version is exact. A household working out what it can repay each month writes down the school fee even in the months it is not due. A list of only this month's outgoings makes the household look richer than it is. A review that lists only what appears on the statement is doing precisely that, and the error is not in any figure but in the label the total is given.

How does the review build the debt service figure for the period?

Debt serviceEverything owed to the lenders in a period: the interest accrued and the principal scheduled for repayment. One is the cost of the borrowing and the other is the return of it, and both have to be paid out of the same cash. is built, not quoted. The figure has two parts, and each is computed from something the record locks.

Interest first. The balance outstanding is Rs 1,260 crore, being the debt side of a project cost of Rs 1,800 crore funded Rs 1,260 crore debt and Rs 540 crore equity, a 70 to 30 structure. At this project's own contracted 9.5 per cent, interest for the period is Rs 119.70 crore. Then the scheduled principal for the modelled year. The record carries that as Rs 63 crore. Debt service is Rs 182.70 crore.

Interest is computed on the balance rather than taken off a previous sheet for a reason that has nothing to do with tidiness. The balance moves as principal is repaid, so the interest figure belongs to whichever period the balance belonged to. A copied interest figure carries no period with it. The figure silently belongs to whichever year somebody last updated, and nothing on the sheet will ever say which year that was.

How is the cover computed, and what must be written beside it?

Step five is the division everybody was waiting for. Rs 248 crore over Rs 182.70 crore is 1.357417, written as 1.36 times. Then two labels go into the same line of text as the answer: the base, EBITDA over debt service, and the period, the modelled year.

The two labels are not a habit of careful people. The labels are part of the identification. A cover ratioCash in a period divided by the amount owed to lenders in that same period. Also called the debt service coverage ratio, or DSCR. Above 1.00 times the cash covers the payment; below it, it does not. can be struck on several different bases and for several different periods, and the number itself carries no trace of which. A ratio without a base has not been identified, and a ratio without a period has not been dated.

Say what 1.36 times does and does not mean, in the same breath. The ratio says the project covers its obligations in the year modelled with 36 per cent to spare, measured against those obligations. The ratio says nothing whatever about any other year. The record contains no other year. An unidentified, undated ratio will eventually be quoted by somebody as though it described the project rather than one year of it, and the two labels are the only thing standing between the division and that sentence.

How far can the cash fall before the cover is gone?

Step six is, for most readers of a review, the single most useful line in it. The cover is 1.36 times. So how much cash can go missing before it is 1.00 times, the point at which the project pays exactly what it owes and not a rupee more?

The headroomThe distance between the cash a project has and the cash it must pay out. Usually more useful stated as the fall that would close it than as the ratio that describes it. is Rs 248 crore less Rs 182.70 crore, or Rs 65.30 crore. The spare is 26.3 per cent of the Rs 248 crore of cash. Now convert it to the line that actually moves. If operating cost holds at Rs 62 crore, revenue has to fall to Rs 244.70 crore for cash to reach Rs 182.70 crore, and Rs 310 crore falling to Rs 244.70 crore is a fall of 21.1 per cent.

Carry the second figure. Revenue varies with how many vehicles cross. Operating cost is mostly staffing and routine upkeep, and mostly it does not vary. Telling somebody the project can absorb a 21.1 per cent fall in revenue puts the answer on the line they were already worried about. Notice also that the cover ratio itself falls by that same 26.3 per cent on the way from 1.36 times to 1.00 times. The cover is nothing but the cash divided by a fixed number.

Move the control to Rs 30 crore. Rs 30 crore is a small figure beside Rs 248 crore, the sort of amount a reader would wave through, and the cover falls to 1.19 times. Move it to the top of the range and the cover is exactly 1.00 times. Now read the whole range at once. At every point from Rs 0 crore to Rs 65.30 crore, the modelled year is covered and the cover is thin, and the record still says nothing about any other year. The conclusion the review reaches holds at every point on the range of the missing figure. The review therefore did not need the missing figure to reach it, and that is what makes a ceiling a working idea rather than a shrug.

What does the reserve buy, measured in something that can be held?

Step seven takes the debt service reserveCash set aside and kept aside, so that a payment due to lenders can be met from it if the project's own cash falls short in a period. The sponsors cannot take it out while it is required. and divides it by the thing it exists to pay. The reserve is Rs 91.35 crore. Debt service for the year is Rs 182.70 crore. Rs 91.35 crore is exactly half of that, so the reserve is two quarters of debt service.

Stating it in quarters rather than in rupees is what makes it usable. Rs 91.35 crore, on its own, is an amount whose adequacy nobody can judge without doing arithmetic in their head. Two quarters of debt service answers the question the reserve was built to answer: how long can the project keep paying while something is being fixed. A reserve is a timing problem converted into a funded buffer, so the honest unit for it is time, and the rupee figure is only the raw material.

One caution belongs on the picture below. The record locks the reserve at two quarters of debt service and carries no payment dates at all, so the four parts below show a length and not a timetable. Real instalments rarely fall in four equal amounts.

What is left for the sponsors, and what is that figure not?

Step eight is a subtraction and then three refusals. Rs 248 crore less Rs 182.70 crore leaves Rs 65.30 crore, the residualWhat is left in a period after everyone ranking ahead has been paid. For the sponsors of a project, the cash remaining once the lenders have taken interest and scheduled principal. for the sponsors in the modelled year. Against equity of Rs 540 crore that is 12.09 per cent in that year.

Beside it are written the three things that figure is not. Every one of the three is a sentence somebody will otherwise supply.

The residual is not a return over the life of the project. The record carries no concession period and no schedule beyond the modelled year, so no life exists to spread the figure over. The residual is not a profit either. No tax charge and no maintenance spending has come out of the Rs 248 crore it descends from. And it is not comparable with a yield on an instrument. Part of what the lenders took, the Rs 63 crore of principal, was a repayment of capital rather than a cost of it. A single year's cash on a single year's equity is a measurement of one year, and the moment it is written without those three refusals beside it, it starts being read as something far larger than it is.

How are the years the record cannot show written down?

Step nine produces no figure at all. The list of what the record could not reach is written out and handed over with the review.

For Tapti Crossing Infrastructure Private Limited the list has four items. There is no concession period, so nothing says how many years of collection exist. There is no debt tenor, so nothing says how many more instalments follow the Rs 63 crore. There is no traffic behind the Rs 310 crore of revenue, so nothing says how that figure was reached or what would move it. And there is no schedule after the modelled year, so nothing says whether debt service rises, falls or holds.

Naming an absence is not the same as estimating around it. The moment a plausible tenor is written into the sheet because a sheet with a gap looks unfinished, everything computed from it inherits an invented figure that nobody afterwards can distinguish from a locked one. A review that ends with the list of what could not be seen is finished. A review that ends without it looks finished and is not, and the reader has no way to tell what was checked from what was never available.

What does the finished sheet look like, run once end to end?

Here is the whole sequence on Tapti Crossing Infrastructure Private Limited, every division shown, in the order the steps run. The table is the output a reviewer actually hands over rather than a summary.

Two lines in that table are worth pausing on together. The cover of 1.36 times and the ceiling in step three are the same claim seen twice, and quoting the first without the second is the error the next block describes. The sequence produces a reading and a list of unknowns rather than a conclusion about whether the project is sound.