Cash flow available for debt service, CFADS, is the number every project finance structure rests on. It is the numerator in the debt service coverage ratio, the basis for sizing the debt, and the line a lender reads first when a covenant test comes round.
It is also routinely calculated wrong, usually by treating it as EBITDA with a different name.
The formula
CFADS = EBITDA − cash tax paid − increase in working capital − maintenance capex ± reserve account movements
Built bottom-up from the cash flow, the same thing reads:
- ·Revenue received in cash
- ·Less cash operating costs
- ·Less cash taxes paid
- ·Less or plus movements in working capital
- ·Less maintenance capital expenditure
- ·Plus or less movements in reserve accounts, where the facility agreement permits
- ·Equals CFADS
Both routes must land on the same number. If your model builds it both ways and they differ, one of them has an error.
What CFADS deliberately leaves out matters as much as what it includes. Interest and principal are not deducted, because they are the debt service CFADS is measured against. Depreciation and amortisation are not deducted, because they are not cash. Distributions to equity are not deducted, because they rank below debt in the cash flow waterfall.
A worked example
An operating asset over one annual test period:
- ·Revenue: 10,000
- ·Cash operating costs: (3,200)
- ·EBITDA: 6,800
- ·Increase in working capital: (300)
- ·Maintenance capex: (500)
- ·Cash tax paid: (700)
- ·Transfer to the major maintenance reserve: (200)
- ·CFADS: 5,100
Debt service for the same period is 1,900 of interest plus 2,000 of scheduled principal, so 3,900.
DSCR = 5,100 ÷ 3,900 = 1.31x
Now the two errors we see most.
Using EBITDA instead of CFADS: 6,800 ÷ 3,900 = 1.74x. Coverage overstated by a third. The structure looks like it has far more headroom than it does, and debt sized from this number will not survive credit review.
Deducting interest inside CFADS as well: (5,100 − 1,900) ÷ 3,900 = 0.82x. Interest is counted twice, once in the numerator and again in the denominator. The model now shows a breach that does not exist. Because the error points in the conservative direction, it often goes unchallenged.
The correct answer, 1.31x, sits between the two. Neither shortcut lands anywhere near it.
Each line, and where it goes wrong
Revenue and operating costs in cash, not accruals. A contract that bills quarterly in arrears produces revenue in the income statement before the cash arrives. CFADS only counts the cash.
Cash tax, not the tax charge. The tax line in the income statement includes deferred tax and timing differences. CFADS deducts the tax actually paid in the period. Interest is usually tax deductible, so cash tax depends on the debt, and the debt depends on CFADS. That is one of the sources of circularity in a project finance model, and it needs a controlled resolution rather than a switched-on iteration setting.
Working capital, as it actually moves. Assuming working capital nets to zero is convenient and usually wrong. A growing business, a seasonal one, or one with slow-paying offtakers will absorb cash in exactly the periods the lender is testing.
Maintenance capex, always. It is tempting to leave it out of early models because the operating assumptions are not developed yet. An asset that is not maintained does not produce the revenue the projection assumes, so leaving it out flatters coverage in precisely the years that matter. Growth capex funded from separate sources is normally excluded; the agreement will say.
Reserve accounts, as the agreement defines them. Transfers into a debt service reserve or maintenance reserve usually reduce CFADS, and releases may add back. Agreements vary on whether reserve movements sit inside CFADS at all, so this line follows the document, not convention.
Starting from operating cash flow instead
Accountants often reach CFADS from the cash flow statement rather than from EBITDA. That works, with two adjustments:
- ·Add back interest paid if your accounting policy classifies it within operating activities, so it is not deducted twice
- ·Deduct maintenance capex, which sits in investing activities and is otherwise missed
Then apply the reserve account movements the agreement requires. The result should reconcile to the EBITDA-based build. If it does not, the difference is usually tax, working capital or a misclassified interest line.
Your facility agreement defines it, not the textbook
There is no universal definition of CFADS. The formula above is the common shape; the version that counts is the one written into your facility agreement.
Agreements differ on whether CFADS sits before or after tax, whether maintenance capex is deducted in full or only above a budget, how reserve accounts are treated, whether hedging settlements are included, and what happens to cash held at project level but not yet distributed. A model built on a sensible but different definition will produce coverage figures the lender does not recognise, and reconciling them under credit committee deadlines is avoidable work.
Ask for the term sheet before you build. If it does not exist yet, model the definition you expect, label it clearly, and keep each component switchable in one place so the model can follow the agreement when it lands.
CFADS and DSCR together
CFADS is the cash. DSCR is the test: CFADS divided by the principal and interest due in the same period. The two must be measured over the same window. A model with semi-annual payment dates and quarterly CFADS produces a ratio that is arithmetically clean and meaningless.
CFADS also drives the debt itself. In a properly built project finance model, the facility amount is solved from forecast CFADS at the target coverage ratio, and with a sculpted repayment profile, principal is shaped to the CFADS profile period by period. Get CFADS wrong and the debt quantum, the equity requirement and the sponsor's return are all wrong with it.
Five checks before you send the model to a lender
- ·Does CFADS reconcile between the EBITDA build and the cash flow statement build?
- ·Is interest excluded from the numerator and present only in debt service?
- ·Is cash tax used rather than the income statement charge?
- ·Is maintenance capex deducted in every operating period?
- ·Does every line trace to a clause in the term sheet or facility agreement?
If the answer to any of them is no, the coverage figures are not yet ready to defend.
Building or refinancing a debt-funded project? We build lender-ready project finance models with CFADS defined to your facility agreement, debt solved from it, and coverage tested in every period. If you already have a model, our financial model review checks exactly these mechanics before a lender does.
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