Project Finance 101 : Cash Flow Waterfall

In the world of sustainable project finance, understanding the language of metrics is crucial. These metrics are not just numbers; they narrate the financial story of a project and speak to its viability, risks, and returns. In the second installment of Banyan Infrastructure’s latest blog series, Project Finance Metrics 101, we will dive into another essential metric that charts a project’s cash flow: 

Cash Flow Waterfall

Think of an itinerary for a project's cash flows; this is what a Cash Flow Waterfall is. It dictates the order in which a project’s revenue is allocated to various expenses, debt services, reserves, and equity returns. By sequencing cash distributions, a Cash Flow Waterfall ensures that critical obligations are met first, safeguarding the financial integrity of the project as it moves along.

Why the Cash Flow Waterfall matters:

Capital Planning and Forecasting

Cash Flow Waterfall allows you to have visibility into upcoming cash requirements, and take appropriate measures to ensure you have the right amount of cash on hand to meet your upcoming requirements.

Risk Mitigation

By prioritizing cash distribution to crucial debt and operational expenses, the Cash Flow Waterfall minimizes the risk of defaults and ensures the smooth execution and operation of a project.

Investor Assurance

When investors know the precise order of payments, they have clarity and assurance. This transparency helps manage expectations and reinforces confidence in the project.

Enforcing Discipline

Cash Flow Waterfall enforces financial discipline by ensuring that surplus cash is either saved for future contingencies, or distributed to equity holders after satisfying all other higher-priority obligations.

What should you be aware of?

Because of its structure, it may be challenging to adapt the Cash Flow Waterfall to unexpected changes in the project's cash flow sequence, potentially leading to inefficient capital allocation.

In addition, the level of granularity of a cash flow waterfall doesn’t get to specific transaction dates, and is typically tracked on a monthly or quarterly basis. This means you need to ensure that within those periods, you account for day to day variance of cash needs. 

Despite this, the Cash Flow Waterfall is a crucial component of project finance. It complements metrics like the Internal Rate of Return (IRR) by offering a detailed map of cash flow distribution, enhancing the predictability and stability of a project’s financial structure.

Software frees the flow

The complexity of managing and forecasting the Cash Flow Waterfall can be daunting, but with tools like automation and digitization, software can free the flow. In our latest product release, we describe how you can use software like Banyan Infrastructure to capture your Cash Flow Waterfall in real time, and utilize it for improved performance management and capital planning, and quickly provide investor assurance on their distributions and critical metrics.

Follow along to learn more about metrics and software

Metrics provide a holistic view of a project's financial health, and guide stakeholders through the complexities of project finance. IRR and Cash Flow Waterfall work hand-in-hand to guide a project’s execution, but there are other metrics that are just as important to consider.