Working capital is one of those areas of a financial model that looks simple on the surface but causes a disproportionate number of errors. Our model audit team has audited more than 2,000 transaction models, and working capital miscalculations are among the issues it finds most often. The consequences are real. An incorrect working capital adjustment can misstate cash available for debt service, distort DSCR calculations and lead to incorrect debt sizing.
Meenakshi Mangal (opens in a new tab) (Director, Model Audit), Dolly Goyal (opens in a new tab) (Manager, Model Audit) and Emilien Hardy (opens in a new tab) (Associate Director, Financial Model Build team) presented a Forvis Mazars webinar on the subject. They walked through six calculation approaches with Excel demonstrations, set out the most common modelling errors and explained how to model a working capital facility. This article captures the main points from that session.
What working capital is and why it matters in project finance models
Working capital is an adjustment for the timing difference between when revenue or costs are recognised and when cash is actually received or paid. In most project finance models, particularly during operations, distinguishing between accruals and actual cash flow is essential.
When revenue is recognised but payment has not yet been received, this creates a debtor (accounts receivable) balance on the balance sheet. When an expense is incurred but not yet paid, this creates a creditor (accounts payable) balance. The working capital adjustment makes the model reflect actual cash movements rather than accounting entries.
“A project may appear profitable on paper, but still face a cash shortfall if receivables pile up or payments are delayed. Working capital gives you the true picture of cash in a period.”
The significance in project finance is direct. Cash flow drives debt service, distributions, reserve account funding and covenant compliance. If working capital is ignored or modelled incorrectly, the project may appear more liquid than it is, leading to misleading debt sizing or incorrect DSCR calculations.
Consider a simple example. Revenue of 100,000 is recognised in July 2025 but has a one‑month payment lag. In the cash flow waterfall, that 100,000 appears in August, not July. Any debt repayment or distribution that depends on that cash can only happen in August. Without the working capital adjustment, the model would overstate July’s available cash and understate August’s.
Six approaches to calculating working capital in a financial model
There is no single correct method for calculating working capital. The right approach depends on how payment delays are specified in the project agreements and how cash actually flows. Using the wrong method for the given delay assumption is itself one of the most common errors our audit team finds.
Days delay less than one period
The simplest method, suitable when the debtor delay is shorter than the minimum number of days in any period on the timeline. For a monthly model, this means delays of 28 days or fewer. Cash received equals days in period minus debtor days, divided by days in period, multiplied by revenue, plus the opening balance. The method breaks down when the delay exceeds the shortest period length.
Days delay greater than one period
When the delay spans more than one period, cash received must be split across two periods. For a 45‑day delay on a monthly timeline, revenue accrued in July would be partly received in August (16 days’ worth) and partly in September (the remaining 15 days). This method works for delays between one and two periods but not outside that range.
Monthly delay using the opening balance
When the delay is specified in whole months rather than days, cash received simply equals the negative of the opening balance. This is the simplest method but only works for a delay of exactly one month.
Monthly delay using OFFSET
For delays specified as several whole months, the OFFSET function refers to revenue from the current period and offsets it by the number of months specified. This is dynamic and works for any number of whole‑month delays, from one month to 12 months or more.
Specific month delay
Some contracts specify that all cash is received at the end of a particular month each year rather than with a rolling delay. In this case, revenue accumulates through the year and is received in a single payment at the end of the specified month. The method is dynamic across all 12 months but only applies when the contract specifies this payment structure.
Percentage‑based receipt
When cash is received as a percentage of revenue accrued across several periods, the calculation splits receipt according to the specified percentages: for example, 50% in the current month, 20% in the following month and 30% in the month after. This can accommodate splits across three, four or more periods.
A seventh approach uses a target balance method. The closing debtor balance is calculated as revenue multiplied by debtor days divided by days in the month, and cash received is derived from the movement between the opening and closing balances.
“Based on different assumptions and the flow of cash in the model, there are different approaches we can use to calculate working capital. Each method has its own advantages and disadvantages.”
The method must match the delay assumption. Applying a days‑based method when the delay is specified in months, or the reverse, will produce errors. For how these cash flow adjustments feed into later calculations, our tutorials on CFADS and the features of a cash flow waterfall in project finance cover the broader structure.
Common working capital modelling errors and how to avoid them
From its model audit work, the team highlighted six errors it finds regularly.
Calculations beyond the project timeframe
If the model has a one‑month debtor delay and the final operations period is June 2030, the revenue accrued in that final period would normally be carried forward to July. But there is no July in the model. The closing debtor balance must be zeroed out by receiving all outstanding cash in the final period. The fix is to add a condition: when the period end equals the operations end date, cash received equals the opening balance plus revenue, forcing the closing balance to nil. The one exception is a going concern model where operations are assumed to continue indefinitely.
Mid‑period delay mismatch
A 15‑day delay is not the same as half a month. In a 31‑day month, half a month is 15.5 days. In February it is 14 days. Similarly, a 30‑day delay is not the same as a one‑month delay. Using a monthly method when the assumption is specified in days will produce errors in months where the day count does not align. If the assumption is in days, use the days‑based method.
Positive cash received values
If the cash received line shows a positive number where it should be negative (or the reverse), the wrong calculation method has been applied. This typically happens when a days‑delay method designed for delays shorter than one period is used with a delay that exceeds one period. The 45‑day delay example on a monthly timeline produces a positive, incorrect cash received figure if the single‑period method is used instead of the multi‑period method.
Incorrect signs on the net working capital adjustment
The net working capital adjustment for the cash flow statement needs different sign conventions for debtors and creditors. For debtors: opening balance minus closing balance. For creditors: closing balance minus opening balance. Applying the same formula to both produces an incorrect net adjustment.
Working capital left out of the DSCR
If the financing documents specify that the DSCR is calculated on a cash basis, CFADS must include the net working capital adjustment, not just accrued revenue and expenses. Using revenue accrued instead of cash received will overstate or understate CFADS, depending on the direction of the working capital movement in that period.
GST or VAT on accrued rather than received amounts
If GST is calculated on revenue accrued without adjusting for the debtor delay, the GST cash flow will not align with when the cash is actually received. Apply GST to cash received, or to revenue accrued plus the net working capital adjustment for debtors.
How to model a working capital facility in project finance
The final section of the webinar covered how the initial working capital requirement is funded and how a working capital facility operates within the cash flow waterfall.
When operations begin, there is typically a funding gap. Revenue is accrued but not yet received, creating a cash shortfall in the early periods. There are several ways to fund this initial need: a dedicated cash reserve funded by equity, debt and equity drawn at the end of construction, or a working capital facility.
The strict role of a working capital facility is to cancel out the effect of changes in working capital. Lenders and equity investors want the cash flow to behave as if there were no timing differences between accruals and actual receipts. The facility draws when working capital increases (cash is owed but not yet received) and repays when working capital decreases (deferred cash is collected).
“The role of the working capital facility is to get you back to the position as if there was no timing differences between your accruals and your cash received and paid.”
This is distinct from an overdraft facility, which covers any cash shortfall whatever its cause. The two are often confused in practice, but the mechanics differ. A working capital facility is linked to movements in the working capital balance, while an overdraft facility responds to the overall cash position.
The financing costs of a working capital facility mirror senior debt: upfront fees paid at financial close or first drawdown, interest made up of a margin and base rate (fixed or floating) and a commitment fee calculated as a percentage of the undrawn amount.
An important structural point is that the working capital facility typically sits junior to senior debt in the cash flow waterfall. Interest and principal payments on the working capital facility appear below senior debt service and below the DSRA funding requirement. This reflects the different risk profile of working capital lending compared with senior project finance debt.
The webinar also covered negative working capital, where cash is received before the matching revenue is accrued (for example, through favourable contractor payment terms). In this case the working capital facility is not drawn. Instead, the surplus cash is placed in a cash reserve and used to fund any later positive working capital movements before the facility is called on.
For the debt structures that interact with working capital facilities, our tutorials on debt sculpting to target DSCR without VBA and cash sweep analysis cover how debt service, distributions and reserve accounts flow through the waterfall.
To build these skills hands‑on, our Best Practice Project Finance Modelling course covers the foundational method, and Advanced Project Finance Modelling covers detailed debt sizing, facility modelling and scenario analysis.