Capex, opex, budgeting and cash flow

0:00 The uses side nobody finishes

Here's a mistake I've seen sink more than one project. The team budgets the headline construction price, the EPC contract, and forgets everything else it takes to reach operations: owner's costs, contingency, interest during construction, financing fees, reserve accounts and working capital. On a big project, those items can add a large share on top of the construction price. Discover them late, and you have a funding gap at the worst possible moment. In this lecture you'll learn the difference between capital and operating expenditure, how to think in whole-life cost, how to structure development, construction and operating budgets, how to build a sources and uses table that actually balances, and how to turn a budget into a cash-flow profile. By the end, you'll be able to draft a complete sources and uses table for any project.

1:00 Why it matters

Why does this matter? Three reasons. First, classification. Whether a cost is capital or operating changes reported profit, tax timing and often who approves it. Second, whole-life thinking. The cheapest asset to buy is often not the cheapest to own, and project finance deals last decades, so the SPV lives with its running costs for a very long time. Third, completeness. Lenders fund a sources and uses table at financial close. If a use is missing, it isn't funded, and the gap surfaces during construction, when your options are expensive: sponsor top-ups, standby facilities or cutting scope.

1:42 The concept: capex, opex and whole-life cost

Capital expenditure, or capex, buys or builds long-lived assets: land, construction, equipment, major upgrades. It's usually capitalised on the balance sheet and depreciated over the asset's life. Operating expenditure, or opex, covers day-to-day running: staff, maintenance, insurance, utilities, consumables and management fees. It's expensed in the period incurred. Some items are grey areas, like major component replacements or customised software, and the exact classification depends on accounting standards, IFRS in Pakistan, the UAE, Saudi Arabia and the UK, or US GAAP in the US, and on company policy. Always check with finance. Then think whole-life: whole-life cost equals capex, plus the present value of opex, plus major maintenance and decommissioning, minus any residual value. It's like buying a car: the sticker price matters, but so do fuel, servicing and what it's worth when you sell it.

2:41 Worked example one: two chillers in Lahore

Let's work a simple example from the lesson. A fictional hospital operator in Lahore compares two chillers for a new wing. Option A costs one point two million dollars and has energy and maintenance costs of two hundred and sixty thousand a year. Option B costs one point six million and runs at one hundred and eighty thousand a year. Both last fifteen years. At an eight per cent discount rate, the fifteen-year annuity factor is about eight point five six. So the present value of A's running costs is about two point two three million, and B's is about one point five four million. Whole-life cost: A about three point four three million, B about three point one four million. Option B costs more upfront but is roughly three hundred thousand cheaper over its life. And if the capex budget is capped, finance might explore leasing or energy-performance contracting to access option B.

3:48 Worked example two: sources and uses

Now the realistic example: a sources and uses table, with illustrative numbers in millions. Uses first. The EPC contract, three hundred and ten. Owner's costs, eighteen. Development costs and fees, twelve. Contingency, twenty-five. Interest during construction, thirty-eight. Financing fees, nine. Initial funding of the debt service reserve account, twenty. Working capital, eight. Total uses: four hundred and forty. So the headline construction price is only about seventy per cent of what must be funded. Sources: senior debt, three hundred and thirty, and sponsor equity, one hundred and ten. Total: four hundred and forty. Uses equal sources. Now notice something important. Interest and fees are themselves uses that must be funded. More debt means more interest, which needs more funding. That's a circularity, and the model has to handle it carefully, which we'll cover in the modelling module.

4:48 Watch me do it: a balancing sources and uses sheet

Let me show you how I lay out a sources and uses sheet so it never goes out of balance silently. Uses on the left, each with a basis column: the EPC price from the signed contract, owner's costs from the budget, interest during construction from the model, and so on. Total uses is a simple SUM. On the sources side, senior debt is the lower of the gearing cap times total uses, and the debt capacity from the cash-flow sizing, which comes later in the course. Equity is total uses minus debt, so it always balances by construction. And then a check cell: sources minus uses, which must be zero, formatted to turn red if it isn't. Finally, a gearing line: debt over total uses. Now, when someone changes the contingency, everything updates, and the check tells you immediately if something's broken.

5:50 Budget phases and cash timing

Project budgets usually have three phases. Development costs: feasibility, permits, advisers, land options and bid costs, which are at risk until financial close. Construction costs, which are the uses of funds we just built. And operating costs: fixed and variable opex, lifecycle or major maintenance, insurance and taxes. Then comes timing. A budget says how much; a cash-flow profile says when. Build a monthly or quarterly construction cash-flow forecast from the EPC payment schedule, owner's cost timing and financing fees. Then agree the funding order. Lenders often require equity to go in first, or pro rata with debt, so their money isn't at risk before the sponsors'. Some sponsors use an equity bridge loan to defer their cash injection, backed by guarantees, which improves their returns but adds cost.

6:46 Common mistakes

The common mistakes. Forgetting financing costs, reserve funding and working capital in the uses. Misclassifying costs and then being surprised by the effect on profit or tax. Choosing the lowest capex option without whole-life analysis. And assuming funds will be available when needed, without a drawdown plan. A quick self-check for any budget: are capex and opex coded separately from the first transaction? Does the uses side include financing costs, reserves and working capital, or only the headline construction price? Is there a cash-flow profile showing when each source is drawn? And has any major option been compared on whole-life cost rather than purchase price? A no to any of these is a common root cause of funding surprises later.

7:38 Recap and try this now

Let's recap. Capex buys long-lived assets and is capitalised; opex runs the asset and is expensed, and the classification should be agreed with finance. Compare options on whole-life cost, not purchase price. Build complete budgets across development, construction and operations, and make sure the uses side includes financing costs, reserves and working capital. Sources must equal uses, and a check cell should prove it every time something changes. Then turn the budget into a cash-flow profile with an agreed drawdown order. Your try-this-now: draft a sources and uses table for a small project you know, even a business expansion. Include financing costs, contingency and working capital, and add a check cell that proves it balances.