Financial Modelling

Use Financial Modelling to Realize Project Asset Value

By Asim Ayaz and Ben Prashaw

Do you ever wonder about the true value of your organization’s physical assets? With both operational and construction costs on the rise, it’s essential to know how your portfolio is performing so you can make sound, well-informed business decisions.

Inflation in Canada remains high, making it difficult for you, as an asset owner, to evaluate the efficiency of your investments. It’s also becoming more challenging to generate realizable value regardless of whether you’re selling an existing asset or investing in a new project that will generate revenue and positive cash flows. A crucial step to assessing the value of your assets and making better, data-informed decisions when taking on new projects is through financial modelling.

What is financial modelling?

Financial models are designed to give project owners a better understanding of the value of their projects. They are a tool to help you set measurable targets by reviewing a project’s anticipated expenses and earnings, while also calculating potential risks, current market conditions, funding sources, delivery model selections and more.

Since financial models are completed in a project’s conceptualization phase, they are based on assumptions. To truly reap the benefits of a financial model, you need to have an understanding of the existing market and project sector, as well as prior experience to inform your project assumptions – a knowledge set that can be outsourced to an industry advisor with extensive expertise working in different sectors across the country.

However, in today’s economy, you might be wondering – is financial modelling worth the investment?

Five benefits of financial modelling

When it comes to infrastructure projects, the cost of investing in a financial model is quickly recovered. The information it provides offers several benefits, including:

1. Better Investment Decision-Making

Financial models enable you to evaluate the risks and rewards associated with different investment strategies. This approach is based on data and offers you the opportunity to explore and understand why a certain approach, schedule or funding source will improve the value of your investment. Taking the time to evaluate your project in the conceptualization phase gives you the ability to make well-informed, data-driven investment decisions.

2. Informed Project Planning

Complete with spending forecasts, you can use your financial model to make informed decisions about how to structure long-term projects. From delivery methodologies to scheduling and cost forecasts, determining how a project will be delivered – both in terms of finances and structure – is important to its overall success. A financial model gives you the information you need to evaluate whether a project is a worthwhile investment and is required if you are seeking investors. Additionally, in cases where a project is one of several you are considering, a financial model gives you the foresight to make informed investment decisions about your overall capital program. Lastly, the model allows you to plan your annual cashflows to match revenues with operations and maintenance costs. This is critical to confirming that an asset can cover its own costs and that external sources of capital will not be needed to operate the asset in the future.

3. Secure Funding Streams

When taking on long-term projects with large investment potential, it is incredibly important to have the support of investors or funding sources. A fully developed financial model will strengthen funding applications and can also be shared directly with potential investors, offering them data and further incenting them to support your project.

4. Risk Management

Financial modeling will give you a greater understanding of the risks associated with your investments. By modeling different scenarios, you’ll be able to identify potential risks and develop strategies to mitigate or manage those risks. Financial modelling can play a major role in procurement options analysis. Choosing the best procurement methodology for a particular project is often based on its projected financial outcomes and the amount of risk being transferred from one party to another. In some instances, shifting risk responsibility to the party that is best able to manage that risk can lower the cost of a project and improve its chance of success. Demonstrating the identification and mitigation of risks also provides potential investors or funders with the information they need to make investing decisions.

5. Performance Measurement

Knowing how your existing assets are performing and/or setting performance metrics for a new asset can help you track investment performance over time. Project performance metrics enable you to evaluate the effectiveness of your investment strategies and make the necessary adjustments to achieve your goals. By creating a model that analyzes the performance of different asset classes and investment strategies, asset owners can identify the optimal portfolio allocation that will maximize returns.

Investing in a financial model will give you peace of mind that your project is feasible, financially sound and well received by the community. Its numerous benefits give you the foresight to confidently execute and manage your capital programs. So, if you’re unsure about how your next project will be received or how it will perform, consider a financial model.