When you are presenting your project to an investor, you need to present a financial model together with your business plan and other documents in the checklist.

When an investor is sending a proposal to a bank or a fund asking for resources for their project, then having a well prepared package can significantly reduce the due diligence time and also show that the investors are serious and well prepared to undertake the investment. The same also stands for the financial model and that is why it is important to include a well structured and standard model as part of the package that project developers are sending to different investors.

But is this the only reason why developers are building the model or should they also use it for their own internal analysis and decision making?

To me this is a fact. Financial model is a tool for decision making. That is why I insist to make it flexible so that different stakeholders can use the same model for their decision making. However, this week, I had an exchange with someone and I realized that not all developers are having the same mindset! They use the model only to fulfil the checklist of lenders and their co-sponsors. This to me is such a waist of recourses. You already have a tool in your hand that enables you to make better decisions and you rather do quick and dirty calculations rather than doing a proper analysis using the financial model? What a waist!

When should a developer start building a financial model?

At the idea stage. When the developer starts thinking about the project, that is when the model is needed. The developer should use the model to test different project technical and financing specifications.

When should the model be updated?

You need to update the model, whenever you receive a new project document or even after any discussion with any party involved in the project. For example, you have a call with lenders and they indicate that they might consider a debt service reserve account to be put in place and pre-funded. Even if this is still not contractual, you should start building the DSRA if it is not already included in your model or to activate it and see the impact on project return and ratios.

Can the same version of the model be used during different phases of the project development ?

From the beginning, developers should invest in a structured and flexible financial model. Of course the model can be restructured at any point in time. For example, the model can be used for tariff negotiation and tariff will be an output of the model. Once the tariff is fixed, then the model can be restructured to have the tariff as an input. However if the model is well designed, the restructuring will not be that complicated and can be done by removing couple of modules and introducing new inputs.

Can the same model be used by different stakeholders?

This is absolutely recommended. For more on this please refer to my post on “One Model Approach”.