Working Capital Finance for Projects – Requirements & Sources

Working Capital = Current Assets - Current Liabilities

Even though project finance focuses on long-term capital (debt and equity), working capital is critical for smooth operations.

Working Capital Requirements

Construction Phase

Minimal requirements (most payments on milestone basis):

• Advance to contractors: 10-20% of contract value
• Material inventory: Cement, steel (1-2 months stock)
• Running bills: 30-45 days payable cycle

Funded by: Equity or short-term bank facilities

Operational Phase

Higher requirements:

Current Assets:

• Receivables: 30-90 days (revenue billed but not collected)
• Inventory: Spare parts, fuel (30-60 days)
• Cash & Bank: Operating expenses buffer

Current Liabilities:

• Payables: O&M costs, utilities (30-45 days credit)
• Short-term debt: Overdraft facilities

Cash Conversion Cycle

Cash Conversion Cycle = Days Receivable + Days Inventory - Days Payable

Example - Power Plant:

• Receivables: 60 days (DISCOM payment delay)
• Inventory: 30 days (coal stock)
• Payables: 30 days

Cash Cycle = 60 + 30 - 30 = 60 days

Working Capital Need = (Annual Operating Cost / 365) × 60 days

If operating cost = ₹365 crore/year:

• Daily cost = ₹1 crore
• Working Capital = ₹1 crore × 60 = ₹60 crore

Sources of Working Capital

1. Cash Credit / Overdraft

• Limit: Based on current assets (receivables + inventory)
• Drawing Power: 75-80% of receivables + 50% of inventory
• Interest: 10-13% p.a. (charged only on utilized amount)

2. Bill Discounting

• Power plants discount receivable bills with banks
• Get immediate cash (90-95% of bill value)

3. Letter of Credit (LC)

• For equipment/fuel procurement
• Bank guarantees payment to supplier
• Deferred payment (90-180 days)

4. Escrow Surplus

• After debt service, surplus retained in escrow
• Used for working capital

Summary

• Working capital needed for receivables, inventory, and operational expenses
• Cash Conversion Cycle: Receivables + Inventory - Payables
• Sources: Cash credit, bill discounting, LC facilities
• Operational phase requires ₹50-100 crore for large projects

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